FAMILY TAX PLANNING
SOLUTIONS TO RESEARCH PROBLEMS
This trust may be considered a grantor trust under § 677(b), which provides that ‘‘income of a trust shall
not be considered taxable to the grantor merely because such income in the discretion of another person,
the trustee, or the grantor acting as trustee or co-trustee, may be appointed or distributed for the support or
maintenance of a beneficiary (other than the grantor’s spouse) whom the grantor is legally obligated to
support or maintain,
to the extent that such income is so applied or distributed.’’ The income from
the trust was, in fact, distributed to the beneficiary S and used by him to pay educational expenses.
Therefore, the research question is whether educational expenses are regarded as support and maintenance
that P is legally required to provide to his son S.
The Internal Revenue Service has long made the argument that parents have a legally enforceable
responsibility to pay the school and college bills of their children [see
Morrill, Jr. v. U.S.
, 228 F . Supp 734
(D.Ct. Maine, 1964)]. However, Federal courts have consistently looked to the laws of the state in which
the grantor is a resident to determine the status of educational costs as support and maintenance payments.
, 48 TCM 210, T.C. Memo 1984 -285, the Tax Court had to consider whether residents of the
state of New Jersey were legally obligated under state law to pay college tuition and room and board
expenses of an unmarried child over the age of 18. The Court held that ‘‘the import to our facts is clearly
that petitioners retained the obligation to provide their children with a college education. They were both
willing and able to do so, a college education was imminently reasonable in the light of the background,
values, and goals of the parents as well as the children, and petitioners have brought forward no facts or
arguments which would militate against the recognition of this obligation on the part of these particular
The answer to the research question involving P and his son S will depend on the nature of the
support obligation imposed on P under the laws of Missouri. If the law stipulates that a parent with P’s
financial and social status, and with P’s expectations concerning the suitable education of his children, is
required to provide that education, then § 677(b) will control, and the $7,000 of trust income will be taxed
to P rather than to S. If P is not required to provide a college education for S, the grantor trust rules are
inapplicable and the income will be taxed to S under the rules of Subchapter J.
It is well established that the refusal to accept an inheritance may constitute the transfer of a property
interest subject to the Federal gift tax (see Rev. Rul. 76-156, 1976-1 C.B. 292). However, § 2518 provides
a statutory exception to this general rule. Per § 2518(a), a person who makes a ‘‘qualified disclaimer’’