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disclaiming benefits left to it under a trust, but it’s possible to imagine a case where it might
work.
Caleb Example:
Caleb dies at age 60, leaving his $1 million IRA and other assets to a trust to pay
income to David for life, plus principal in the discretion of the trustee for David’s health, support
and happiness. On David’s death, the trust is to distribute $25,000 to Harvard College, and the
balance of the remaining principal to Rosemary and Gilbert (who are younger than David).
Because of the bequest to a nonindividual beneficiary (Harvard), the trust “flunks” the minimum
distribution trust rules, and benefits will have to be distributed under the 5-year rule. If this bequest
did not exist, the benefits could be distributed over the life expectancy of the oldest trust
beneficiary, David, who is only 45. David, Rosemary and Gilbert have always been generous
supporters of Harvard, and have named Harvard as beneficiary of substantial bequests in their own
estate plans. They meet with Chuck from Harvard’s Planned Giving Office and ask Chuck whether
Harvard would like to disclaim the $25,000 remainder bequest under Caleb’s trust. They do not
compensate, or offer to compensate, Harvard for making the disclaimer, or make any threat or
promise about what they will do or not do if Harvard does or doesn’t disclaim. They simply point
out a few facts. First, Harvard wouldn’t be losing much by disclaiming (maximum $25,000, after
life of a 45 year-old; the present value of this is much less than $25,000). Second, they remind
Chuck that, if the life expectancy payout is not available to the trust, the trust will have less money
in it overall, which will mean lower income for David, and less principal available for David,
Gilbert and Rosemary. They point out that the less money these individuals have, the less they
personally can afford to give to Harvard. Finally, they point out that Harvard’s refusal to disclaim
would leave them with a bad taste in their mouths as they see the IRS raid the IRA, and no longer
would the name “Harvard” conjure only sweetness and light in their minds. Harvard disclaims the
bequest. The trust uses the life expectancy payout method. David becomes Class Gift Chairman
for his Harvard 25th Reunion and raises a record amount.
F.
Trust reformation to make it qualify as a see-through.
This is another one to consider
if the participant has already died. With proper proceedings in the Court having jurisdiction
of the trust, it
may
be possible to have a noncomplying trust reformed, settled, divided into
separate trusts, or otherwise re-engineered so that it complies with the trust rules. While
post-death actions to modify a trust are not necessarily effective to cure all “tax defects” in
a trust, the IRS has occasionally ruled favorably on see-through status for a trust that was
reformed after the participant’s death; see CCA 2008-48020 (discussed at
¶ 7.4.03 (B)), in
which the IRS apparently viewed with favor a post-death reformation designed to make a
trust qualify as a see-through. More recent rulings, however, show strong IRS hostility
towards post-death reformations. See PLRs 2007-42026, 2010-21038.
Here is an example of how a reformation could be used to make a trust qualify as a see-
through, if the IRS attitude should thaw:
Dolly Example:
Dolly left her $1 million IRA and other assets to a trust that provided life income
to Brinley, and on Brinley’s death provided a gift of $50,000 to charity and the balance to John or