A New York court ruled that a transfer to a grantor retained interest trust ("GRIT") was not a completed gift, since title on the underlying property was never formally transferred. Robert Towbin held all the shares of stock in a cooperative apartment and had executed a lease that entitled him to occupy the apartment as his personal residence. He then created a GRIT for the purposes of transferring ownership of the apartment to his daughter, naming himself and his daughter as trustees. Under the terms of the GRIT, Robert was entitled to exclusive use and occupancy of the apartment for a fixed term of 15 years. At the expiration of the term, he and his spouse would be required to either vacate the apartment or rent it from the trustee of the GRIT at fair market value.
In furtherance of the transfer, Robert and his daughter executed a stock power, assignment of the lease, and acceptance and assumption of the lease. Robert's attorney advised his daughter that title to the stock and Robert's interest in the lease had been transferred to the trust. Robert then filed state and federal gift tax returns and paid the taxes associated with the transfer.
Under the terms of the lease, Robert was required to notify the co-op of the transfer and seek approval of the assignment of the lease. The lease required that (1) the assignment must be delivered to the co-op board, (2) the assignee must agree to be bound by the terms of the lease and must enter into a new lease with the co-op and (3) the board of directors of the co-op must consent to the assignment. Robert did not follow any of these procedures.
Fifteen years later, Robert ceased to act as trustee and his son succeeded his daughter as trustee. His son claimed he was the rightful owner of the apartment and instituted an action to evict his father and also sought $12 million in damages.
The court noted that in order to make a valid inter vivos gift under NY law, there must be intent to make the transfer, delivery of the gift, and acceptance by the donee. The court noted that execution of the GRIT evidenced the requisite intent to make the gift and acceptance is presumed where, as in the present case, the gift is of value to the donee. Delivery became the disputed matter.
Robert defended the action by claiming that the original transfer was not a completed gift since he had not requested a transfer of records on the books of the co-op (even though he had treated it as a gift on his federal gift tax return fifteen years prior).
The court stated that with a gift of stock, delivery "must proceed to the point of no return, where the donor no longer retains an interest in the stock." The only way this point of no return is reached in the case of stock is a transfer of record on the stock books of the company. The court ruled in Robert's favor, stating that, since he had not complied with the terms of the lease and delivered the assignment to the co-op, the gift was incomplete for lack of delivery. The court left the federal tax compliance issues to the IRS.