Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Tuesday, February 12, 2013

IRS Rules Income Interest is Intangible

IRSThe tax code provides an exemption from U.S. gift taxes for the transfer of intangible property by a person who is neither a resident nor citizen. The exemption applies only in certain situations, but has already caused some controversy. The controversy stems from the tax code, which fails to include the definition of "intangible" property.

In a recent case, a non-resident beneficiary of a trust disclaimed his interest. The disclaimer would have been exempted from the gift tax, but the beneficiary had already received the trust benefits. The beneficiary wanted the Internal Revenue Service (IRS) to find that the income interest was intangible property. This conclusion would classify the interest as a gift, and exempt the disclaimer from the gift tax. According to Rubin on Tax, the case turned on "whether one should look through the trust to look at the character of the trust assets that produce income (to determine if the assets were tangible or intangible, and if tangible, to see where they are located), or whether an income interest is inherently an 'intangible' regardless of what the trust assets are comprised of." The IRS ruled the income interest was intangible.

There are two limitations to the application of the ruling. One limitation is whether the state has a law already on the books about trust income and its classification. Another limitation is case law. One state's case law indicates that when an income beneficiary has no power over a trust the beneficiary does not have an ownership interest in trust assets. However, other states may reach a different result.

See Charles Rubin, Disclaimer of Income Interest was not Taxable for Nonresident, Rubin On Tax, Feb. 7, 2013.


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