According to a recent IRS Private Letter Ruling, a widow's renunciation of a trust resulting from the severance of a nonexempt marital trust will not result in the widow having made a taxable gift of the retained trust.

The husband established a trust providing that on his death all remaining property would be divided into two trusts: a "marital election trust" and a "nonexempt marital trust." This marital election trust was designed to have a zero inclusion ration for generation-skipping transfer (GST) tax purposes. The nonexempt marital trust must distribute its income quarterly to the decedent's wife. The husband's estate made a valid QTIP election for this trust after his death.
 
 

The wife wanted to transfer some of the trust assets to her children. So, the trustee proposed that they sever the nonexempt trust into Trusts A and B. Trust A will contain assets to be gifted to the widow's children, as well as additional funds to pay the gift taxes attributable to those transfers. Trust B will contain the remaining assets of the nonexempt marital trust. Both trusts will contain a strictly proportional amount of all of the assets contained in the nonexempt marital trust, and both trusts will be held under the same terms and conditions as the nonexempt marital trust.

The widow will then make a nonquallified disclaimer of her interest in Trust A, and the assets held in that trust will be distributed to her children. The IRS ruled that

The widow will not be deemed to have made a gift of the property in Trust B;

Her income interest in Trust B will not be valued at zero under §2702;

As long as the widow's renunciation of Trust A is conditioned upon the children paying all gift taxes attributable to the transfer, the taxable amount of her gift will be reduced by the amount of such gift taxes paid by the children.