IRS Issues Guidance on GiftTax Consequences of Transfers in Trust

By Alistair M. Nevius, J.D.

On February 2, the IRS clarified for taxpayers that despite the provisions of Sec. 2511(c), the gift tax continues to apply to certain transfers to a wholly owned grantor trust (Notice 2010-19). Some taxpayers have interpreted Sec. 2511(c) to exclude from gift tax all transfers in trust where the trust is wholly owned by the donor or the donor’s spouse. The notice says the IRS plans to issue further guidance on this topic.

Gift tax generally applies to both direct and indirect transfers (Sec. 2511(a)). Under Sec. 2511(c), a transfer in trust is treated as a gift unless the trust is wholly owned by the donor or the donor’s spouse. Sec. 2511(c) is effective for transfers after December 31, 2009, and before January 1, 2011.

According to the IRS, some taxpayers have interpreted Sec. 2511(c) to mean that any transfer to a trust treated as wholly owned by the donor or the donor’s spouse is excluded from gift tax, even though the gift would otherwise be subject to gift tax. The IRS clarified in Notice 2010-19 that Sec. 2511(c) broadens the scope of the gift tax to include transfers that might otherwise be considered an incomplete gift or that would not have been treated as a transfer under the gift tax provisions in effect before 2010. It does not serve to exclude certain transfers in trust that would otherwise be subject to gift tax; the substantive gift tax provisions continue to apply in 2010.

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