Gift-Splitting When Spouse is Trust Beneficiary

Wife transfers property to a trust for the benefit of Husband. The trust is intentionally structured so as not to qualify for the gift tax marital deduction. Wife files a gift tax return in connection with the gift, and Husband consents to split the gift. Husband is the primary beneficiary of the trust during his life. When Husband dies, will any part of the trust be includible in his estate for federal estate tax purposes?

No.

Underlying the question is the extent to which I.R.C. § 2513 intersects with I.R.C. § 2036. If the requirements of I.R.C. § 2513 are satisfied, a gift made by one spouse to a third party is considered as made one-half by her and one-half by her spouse. Under I.R.C. § 2036, the value of a decedent’s gross estate includes

the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

Therefore, the issue is whether Husband, by virtue of gift-splitting, is deemed to have transferred property to trust while retaining certain benefits from the trust. If the answer is yes, the half of the trust property that Husband was deemed to have transferred would be includible in his estate under I.R.C. § 2036.

The plain language of I.R.C. § 2513, however, hints that this is not the case. Paragraph (a)(1) says that a gift by one spouse will only be considered as having been made one-half by each spouse “for the purposes of this chapter.” The chapter in question is Chapter 12 of the Internal Revenue Code. The estate tax is housed in Chapter 11. Thus, it is only for gift tax purposes, not estate tax purposes, that the non-donor spouse (Husband, in this case) is treated as making the transfer.

Revenue Ruling 74-556 elaborates on this point. In that ruling, husband transferred securities to a custodial account for his daughter, naming himself as custodian. As custodian, he had the power to control his daughter’s use and enjoyment of the securities until she reached age 21. In connection with the gift, husband filed a gift tax return, and wife consented to splitting the gift. Husband later became incapacitated, and wife took over as custodian. When wife died, the question was whether her status as a deemed transferor to the custodial account, combined with her authority over the account as custodian, caused the account to be includible in her estate under I.R.C. § 2038.

The IRS said no. A spouse who consents to gift-splitting is “merely considered” a transferor. I.R.C. § 2038, on the other hand, requires an actual transfer on the part of the decedent. Thus, the IRS concluded that because decedent wife did not transfer any part of the securities to her daughter’s custodial account, no part of their value is includible in her gross estate under I.R.C. § 2038, even though wife was the custodian of the account at the time of her death.

The same logic should apply with respect to I.R.C. § 2036. It also explicitly requires a transfer by the decedent of his property prior to death. A deemed transfer for purposes of Chapter 12 is not sufficient. Therefore, in the scenario described above, gift-splitting will not cause any part of the trust estate to be includible in Husband’s estate.

Posted by Joel D. Roettger, JD, LLM, EPLS

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