2010: A Bad Year For Incomplete Gifts to Non-Grantor Trusts

The IRS has published Notice 2010-19 (IRB 2010-7, Feb. 16, 2010). The Notice provides guidance on the effect of IRC Section 2511(c).  Section 2511(c), enacted as section 511(e) of EGTRRA in 2001, and amended by section 411(g)(1) of the Job Creation and Worker Assistance Act of 2002, provides that “a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under [the grantor trust rules in Code Sections 671 to 679].”

It is effective for gifts made after December 31, 2009 but before January 1, 2011.

Before Section 2511(c) became effective on January 1, 2010, transfers into trusts would be treated as incomplete gifts if, for instance, the donor retained a special testamentary power of appointment. As an incomplete gift, such transfers would not have been subject to the gift tax.

Now, after Section 2511(c) has become effective, a transfer into a trust is a per se completed gift, unless the transfer is made into a wholly grantor trust.

Before 2010, non-grantor trusts were common tools in Delaware trust planning for certain liquidity events. Section 2511(c) has changed the weather for estate planners throughout the nation, as well as in Wilmington….