Section 2511(c) provides that, notwithstanding any other provision of Section 2511 and except as provided in the regulations, a transfer in trust is 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 provisions.
Some advisors interpreted 2511(c) to mean transfers to wholly-owned grantor trusts during 2010 will not be treated as completed gifts for gift tax purposes. IRS Notice 2010-19 clarifies that such an interpretation is incorrect and that gifts to grantor trusts during 2010 may be completed gifts using the same criteria as was in effect on December 31, 2009.
The Notice clarifies that transfers in trust, which would otherwise be subject to gift tax are not excluded from the tax merely because the transfers would not be taxed under Section 2511(c). Section 2511(c) broadens the types of transfers subject to transfer tax to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.
Therefore, a transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse under the grantor trust rules is considered to be a transfer by gift of the entire interest in the property under Section 2511(c). The gift tax provisions in effect on December 31, 2009 continue to apply during 2010 to all transfers made to any other trust to determine whether the transfer is subject to gift tax.