Rev. Rul. 85-24

1985-1 C.B. 329, 1985-10 I.R.B. 10.

EXCLUSIONS; TRUST; RECIPROCAL POWERS TO WITHDRAW CORPUS

Published: March 11, 1985

Section 2503.-Taxable Gifts, 26 CFR 25.2503-3(a): Future interest in property.

(Also Sections 2511, 2514, 25.2511-2. 25.2514-1.)

  Exclusions; trust; reciprocal powers to withdraw corpus. No gift tax exclusions are allowable for creation of reciprocal powers to withdraw corpus from a trust where two or more grantors, acting mutually, each creates a trust for the primary benefit of a child and gives each of the other grantors a corresponding power to withdraw a specified amount from the trust.

ISSUE

  How many annual gift tax exclusions are allowable under section 2503(b) of the Internal Revenue Code in the circumstances described below?

FACTS

  A, B, and C are partners in the X partnership. In July of 1984, A established a trust with $20,000. The terms of the trust provide that trust income shall be

accumulated for the benefit of A's child, F, subject to the trustee's power to distribute in certain special circumstances. Principal and all accumulated income are to be distributed when F reaches age 40. The trust provides that F has the power to withdraw up to $10,000 from the trust for a 60-day period following establishment of the trust. The trust also provides that B and C each has the power to withdraw up to $5,000 from the trust during the 60-day period after creation of the trust. Similar withdrawal powers would apply to any future additions to the trust.

  At the same time that A created the trust, B and C each created a similar trust with a sum of $20,000. The trust created by B was established for the benefit of B's child, G, and granted to G the power to withdraw $10,000, to A the power to withdraw $5,000 and to C the power to withdraw $5,000. The trust created by C for C's child, H, granted to H the power to withdraw $10,000, to A the power to withdraw $5,000 and to B the power to withdraw $5,000.

  A filed a gift tax return showing the transfer of $20,000 in trust as a gift of $5,000 to B and $5,000 to C and a gift of $10,000 to F. A claimed gift tax exclusions for the full amount of each of these three amounts. A's gift tax return also showed no taxable gift for the lapse of a $5,000 power of appointment in favor of G under the trust created by B and no taxable gift for the lapse of the $5,000 power of appointment in favor of H under the trust created by C.

LAW AND ANALYSIS

  Section 2511 of the Code provides that the gift tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real, personal, tangible, or intangible. The grant to an individual of a power to withdraw a sum of money from a trust is generally a gift to the individual of the specified sum. Section 25.2511-2(c) of the Gift Tax Regulations provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself.

  Section 2503(b) of the Code allows an annual gift tax exclusion of $10,000 per donee for transfers made after December 31, 1981, for gifts of present interests. No exclusion is allowed for gifts of future interests. Section 25.2503-3 of the regulations describes a present interest as an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property and a future interest as one limited to commence in use, possession, or enjoyment at some future date or time.

  Section 2514(b) of the Code provides that the exercise or release of a general power of appointment created after October 21, 1942, is treated as a transfer of property by the individual possessing the power. Under section 25.2514-3(c)(4) of the regulations, a release of a power of appointment does not have to made formally or expressly to constitute a release. Section 2514(e) of the Code provides that the lapse of a power of appointment created after October 21, 1942, during the life of the individual possessing the power shall be considered a release of such power, but only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of (1) $5,000, or (2) 5 percent of the aggregate value of the assets out of which, or the proceeds of which, the exercise of the lapsed powers could be satisfied.

  When a trust instrument gives a beneficiary the power to demand immediate possession of corpus, the beneficiary has received a present interest. Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). See also Rev. Rul. 73-405, 1973-2 C.B. 321. However, for the purpose of the gift tax it is the substance of the transaction which controls. Deal v. Commissioner, 29 T.C. 730, 736 (1958); Daniels v. Commissioner, No. 21441 (T.C.M. 1951); Rev.Rul. 77-299, 1977-2 C.B. 343.

  Rev. Rul. 81-7, 1981-1 C.B. 474, stated that if the facts and circumstances of a particular case show that the donor did not intend to give the donee a present interest, no annual exclusion under section 2503(b) is allowable. Accordingly, Rev. Rul. 81-7 holds that the trust provision purporting to give a legally competent adult beneficiary the power to demand corpus does not qualify a transfer to the trust as a present interest eligible for the gift tax annual exclusion if the donor's conduct makes the demand right illusory and effectively deprives the donee of the power.

  When two donors establish similar trusts under circumstances such that the beneficial interests are matching, the transfers may be treated as reciprocal whether or not the transfers were actually in consideration for each other. See United States v. Estate of Joseph Grace, 395 U.S. 316 (1969), 1969-2 C.B. 173.

  In the present case, A's grant of a $5,000 power to B under the terms of the trust created by A was matched by B's grant of a $5,000 power to A under the terms of the trust created by B. There was no gift by A to B because the respective powers of A and B to withdraw $5,000 from each of the trusts were based on adequate consideration. To illustrate, at any time during the 60 day period A could have withdrawn $5,000 from the trust created by B, which could have caused B to protect B's own family's financial position by withdrawing a matching $5,000 sum from A's trust. It is immaterial that the period during which each party has a right to withdraw from the other's trust is not concurrent in time. Similar relationships existed during the 60 day period between A and C and between B and C as to the other $5,000 withdrawal powers. Upon the lapse of the two powers possessed by B and C on the 60th day, an additional gift of $10,000 to F by A became complete. Thus, A made no gift to either B or C, B made no gift to either A or C, and C made no gift to either A or B.

  A $10,000 exclusion is allowable under section 2503(c) of the Code for the $20,000 transferred in trust by A. However no other exclusions are allowable for that transfer. Because A's grant to B of the power to withdraw $5,000 from A's trust was not a gift to B, the failure of B to exercise the power is not considered a lapse of a general power of appointment under section 2514 of the Code. The same is trust of A's grant to C of the power to withdraw $5,000 from A's trust.

HOLDING

  A is entitled to a $10,000 exclusion for the $20,000 A placed in trust for F. No other exclusion is allowable to A.

  Similarly, B and C are each entitled to a $10,000 exclusion for the $20,000 transfer each made to trust for the benefit of G and H, respectively. No other exclusion is allowable to B or C.

Rev. Rul. 85-24, 1985-1 C.B. 329, 1985-10 I.R.B. 10.