Internal Revenue Service
Revenue Ruling
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smRev. Rul. 75-73
1975-1 C.B. 313
IRS Headnote
Property settlement; amount of consideration. The terms of a divorce property settlement trust requires that the trustee pay all the trust income to the wife or, should she become incompetent, pay support which has a present value of less than the present value of the income. The amount deemed a transfer for full and adequate consideration under section 2516 of the Code is the amount required to be paid in the event of the wife's incompetency.
Full Text
Rev. Rul. 75-73
Advice has been requested as to the amount deemed to be a transfer for a full and adequate consideration under section 2516 of the Internal Revenue Code of 1954, where a husband agrees to transfer property to a trust for the benefit of his wife and adult children upon the issuance of a divorce decree.
On May 12, 1973, H and W entered into a written agreement concerning the settlement of their respective marital and property rights upon divorce. In exchange for the release by W of her right to support, H promised to pay $500 per month until the death of either spouse or W's remarriage. In addition, H promised, in exchange for the release by W of any other claim she might have against H or his property, to transfer $400,000 in cash within 30 days after the issuance of a divorce decree to a trust which H created at the same time the agreement was executed.
The terms of the trust provide that all of the income is to be paid in monthly installments to W for her lifetime. However, in the event that W becomes "mentally or physically incompetent," the trustee may, in its sole discretion, pay any amounts of income not necessary for W's proper care and maintenance either to W or to the adult children of H and W, or it may accumulate such surplus income amounts and add them to the trust principal.
The trust will terminate upon the death of W and all remaining income and principal is payable to the issue of H and W.
On June 20, 1973, a decree of divorce of H and W was issued by a court which had no power to alter the terms of their settlement agreement. Shortly thereafter, on June 26, 1973, H transferred $400,000 to the trust as required by the agreement.
In view of W's standard of living, her available resources in addition to the trust income, and the comparable cost of institutional and professional care for her in the event that she may become incompetent, the trustee would be required to pay amounts of income having a total present value of $186,069 for the proper care and maintenance of an incompetent person for the lifetime of W. Based on the valuation principles set forth in section 25.2512-9 of the Gift Tax Regulations, the present value of a right to receive the entire income from the trust for the lifetime of W is $301,904.
H filed a gift tax return for the second quarter of 1973, in which the gift of the remainder interest to the issue of H and W was reported but which treated $301,904, the present value of the entire trust income, as a transfer deemed to have been made to a spouse for a full and adequate consideration in money or money's worth by virtue of section 2516 of the Code.
The question presented is whether the existence of the trust provision for retention or discretionary payment to the adult children of income not needed for the support of W during any period in which she may be incompetent requires a reduction in the value of her income interest in the trust and thus requires a reduction in the amount which may be deemed to be a transfer for a full and adequate consideration in money or money's worth under section 2516 of the Code. However, since W made no transfer, no question arises as to any gift tax liability of W.
Section 2512(b) of the Code provides that where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the transferred property exceeds the value of consideration received shall be deemed a gift for Federal gift tax purposes.
Section 25.2512-8 of the Gift Tax Regulations contains the following provisions:
Transfers reached by the Gift Tax are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business * * * will be considered as made for an adequate and full consideration in money or money's worth. A consideration not reducible to a value in money or money's worth * * * is to be wholly disregarded * * * Similarly, a relinquishment or promised relinquishment of dower or curtesy or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the spouse's property or estate, shall not be considered to any extent a consideration "in money or money's worth." See, however, section 2516 and the regulations thereunder with respect to certain transfers incident to a divorce.
Section 2516 of the Code provides as follows:
Where husband and wife enter into a written agreement relative to their marital and property rights and divorce occurs within 2 years thereafter (whether or not such agreement is approved by the divorce decree), any transfers of property or interests in property made pursuant to such agreement--
(1) To either spouse in settlement of his or her marital or property rights, or
(2) To provide a reasonable allowance for the support of issue of the marriage during minority, shall be deemed to be transfers made for a full and adequate consideration in money or money's worth.
In order for a transfer to be deemed to have been made for a full and adequate consideration in money or money's worth under section 2516 of the Code, it must meet that section's requirement that it be made either to a spouse or for the support of minor children. A transfer of property, in trust or otherwise, does not qualify under section 2516 if the ultimate beneficiary of the transfer cannot be presently identified as being within the class of persons specified in that section. Where a trustee's exercise of discretion must occur before any enforceable right to the transferred property vests in the donor's spouse, no transfer to the spouse has been accomplished at the time the trust is funded, and no exemption from gift taxation is available under section 2516.
However, if it is possible to ascertain the limits on the trustee's exercise of discretionary power and thus predict with reasonable certainty that a given portion of the value of the transferred interest is necessarily payable to the spouse, such portion is deemed to be a transfer to the spouse for the purposes of section 2516 of the Code.
Accordingly, in the instant case, the value of W's right to receive enough trust income to meet her support needs in the event of her incompetency is deemed to be a transfer for a full and adequate consideration in money or money's worth under section 2516 of the Code, since she will, in all events, receive that amount for the balance of her lifetime. Since it is impossible to predict when she may become incompetent and whether the trustee will decide to pay any additional amounts of income to her in such an event, W cannot be considered to have presently received a transfer of any larger amount.
The proper computation of the amount of H's gift pursuant to his agreement with W is as follows:
Value of assets transferred
in trust $400,000.00
Less: Portion deemed to
be a transfer to
spouse for a full and
adequate considera-
tion in money or
money's worth un-
der section 2516
(i.e., present value
of right to income
necessary for sup-
port of W while
incompetent, for the
life of W) 186,069.00
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Amount of gift $213,931.00