Internal Revenue Service
Revenue Ruling
TaxLinks.com
smRev. Rul. 62-13
1962-1 C.B. 181
Caution: Clarified by Rev. Rul. 77-378
IRS Headnote
Where property is transferred to a trust, under the terms of which the trustee is given very broad discretionary powers over the distribution to the grantor of income, and corpus, and where, even though the value of the property transferred is large in amount, under the circumstances there appears to be no assurance at the time of creating the trust that anything of value will be paid to a beneficiary (or class of beneficiaries) other than the grantor, such transfer constitutes, for purposes of the Federal gift tax statute, an incomplete transfer and, hence, does not result in a taxable gift.
Revenue Ruling 54-538, C.B. 1954-2, 316, modified.
Full Text
Rev. Rul. 62-13
Advice has been requested whether the Internal Revenue Service will follow the decision in Commissioner v. Sarah Gilkey Vander Weele , 254 Fed.(2d) 895 (1958), in a situation where a grantor conveys in trust a substantial amount of property, providing for complete discretion in the trustee with respect to distributions of income and corpus to the grantor, and where there is no assurance that anything of value will be paid to a beneficiary (or class of beneficiaries) other than the grantor.
The general rule is that the value of a gift is the value of the property transferred, reduced by the value of any interest therein retained by the donor. See section 25.2511-1(e) of the Gift Tax Regulations. However, where the donor transfers property retaining a reversionary interest which is not susceptible of valuation by recognized actuarial methods, the entire gift is complete. The position stated above is in accord with the decisions in Hulbert W. Smith v. Shaughnessy , 318 U.S. 176 (1943), Ct. D. 1575, C.B. 1943, 1144, and Meta Biddle Robinette et al. v. Helvering , 318 U.S. 814 (1943), Ct. D. 1574, C.B. 1943, 1141. The facts in those two cases are, however, distinguishable from those in the Vander Weele case.
In the Smith case, the donor made an irrevocable transfer in trust providing for payment of income to his wife for life, with remainder to him at her death if he were then living and, if not, to specified third parties. The donor in that case lost all possibility of economic benefit except to the extent that he would recapture the corpus in the event he survived his wife. The value of such a reversionary interest was, concededly, capable of computation by recognized actuarial methods and, hence, deductible in computing the value of the gift subject to tax.
The irrevocable trusts involved in the Robinette case provided for life incomes to the three grantors and subsequent life incomes to others, with remainders to the issue of one of the grantors upon such issue's reaching 21. In default of such issue, remainders were to be subject to testamentary disposition by the last survivor of the three grantors. Here again, the grantors lost all possibility of economic benefit as to the corpus, except as to the contingent reversionary interests. Such interests were, however, conditioned not only upon survivorship but also upon the death of one of the grantors (then unmarried) without issue who should reach the age of 21. It was held that the value of the reversionary interests could not be computed by recognized actuarial methods and, hence, was not deductible from the value of the property transferred in determining the value of the gift for gift tax purposes.
In the Vander Weele case, the grantor created an irrevocable trust to which she transferred certain securities and a contingent interest of substantial value in a large testamentary trust of her grandfather. The trustees were to pay her for life the income from the securities, at least until the falling in of the contingent interest. After that time, the trustees were empowered to pay her such reasonable and substantial portions of the income of the trust as, in their sole judgment and discretion, should seem desirable and ample for her comfortable well-being and enjoyment. They were also empowered to pay her the entire income or to accumulate undisbursed income for the benefit of her children during minority. In addition, the trustees were given sweeping powers to encroach upon corpus for the benefit of the grantor. Such powers were almost unrestricted and surrounding circumstances indicated that the trust had been created primarily for the benefit of the grantor.
The Court of Appeals for the Sixth Circuit, affirming the decision of the Tax Court of the United States, held that under such circumstances there was no actual taxable gift inasmuch as there was no assurance that anything of value would ever pass to the remaindermen. There was only a transfer which, upon contingencies, might become a gift at some future date.
In view of the foregoing, it is held that where property is transferred to a trust under the terms of which the trustee is given very broad discretionary powers over the distribution to the grantor of income and corpus, and where, even though the value of the property transferred is large in amount, under the circumstances there appears to be no assurance at the time of creating the trust that anything of value will be paid to a beneficiary (or class of beneficiaries) other than the grantor, such transfer constitutes, for purposes of the Federal gift tax statute, an incomplete transfer and, hence, does not result in a taxable gift.
The non-acquiescence, C.B. 1957-2, 8, in Sarch Gilkey Vander Weele v. Commissioner , 27 T.C. 340, is withdrawn and acquiescence substituted therefor. See page 3 of this Bulletin.
The rule, stated in Revenue Ruling 54-538, C.B. 1954-2, 316, to the effect that, although a retained interest capable of valuation by recognized actuarial methods should be excluded from the value of the gift, the entire gift is complete where the retained interest is not susceptible of such computation, is considered applicable only to cases where it has already been determined that a gift has been made and the issue concerns the valuation of an interest retained by the donor, as in the Smith and Robinette cases. In that ruling, the Service indicated that it did not consider the decision of the Tax Court in Christianna K. Gramm v. Commissioner , 17 T.C. 1063, holding the gift incomplete, as contrary to the holdings in the Smith and Robinette cases, inasmuch as the terms of the trust with respect to the powers of the trustee, considered together with the fact that the corpus of the trust was relatively small and comprised the entire property of the grantor, indicated the possibility of total depletion of the corpus in the life-time of the grantor. The same principle is deemed applicable in a case like Vander Weele , which involves such sweeping powers to invade income and corpus for the benefit of the grantor that there is no assurance under the circumstances that anything of value will be paid to any beneficiary other than the grantor, and the question of whether or not a transfer is complete for Federal gift tax purposes in such a case does not depend on whether the value of the property transferred is large or small. Accordingly, the nonacquiescence in the Gramm decision published in C.B. 1957-2, 8, is withdrawn and acquiescence is substituted therefor. See page 3 of this Bulletin.
Revenue Ruling 54-538, C.B. 1954-2, 316, is hereby modified to remove any implication that a transfer may be considered a completed gift for Federal gift tax purposes where a power to invade income and corpus for the benefit of the grantor is so great that under the circumstances there is no assurance that anything of value will be paid to any beneficiary other than the grantor.