DISCLAIMERS: USING YOUR REVIEW MIRROR TO PLAN

FizerBeck
Fizer, Beck, Webster, Bentley & Scroggins
a professional corporation
1330 Post Oak Boulevard, Suite 2900
Houston, TX 77056-3022
713-840-7710
www.fizerbeck.com
 

1. INTRODUCTION

   As the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), Pub. L. No. 107-16, rockets into the sunset effective December 31, 2010, Washington is working on the "reformation" of the estate tax, again. Two of the more widely discussed options are (1) freezing the estate tax exemption ("estate exemption") at the what will be the amount under current law for the year 2009 ($3.5 million) for 3 years while Congress works on a solution, and (2) continue to increase the estate exemption in the years following 2009 to an amount that will be "permanent." Of course, you will still hear a voice occasionally mention "repeal" in the context of the estate tax, but not as often as you might have 4 years ago.

   While Congress thinks about the changes in the current estate tax structure, estate planners have to deal with clients in real time. Granted it would be nice to be able to tell a client what the tax laws will be in the next 10 years, but that is not the only variable with which our clients are concerned. Our clients do not know how much they will have when they die due to options, warrants, the swings in the economic markets and the cost of raising their families, and they worry if what they will leave to their spouse, their partner and/or children will be enough to continue the lifestyle they current enjoy. In this type of environment, even the best drafting may have to be adjusted to deal with the facts as they exist at death.

   We need flexibility in our plans to allow our clients to adjust if the facts were not as anticipated. Formulas can change amounts, but only disclaimers can change who will take following a transfer. Disclaimers let you back-up and change the order or the manner of the distributions. The change effectuated by a disclaimer may allow the plan adjust to legislative changes after the document was executed, or effectuate the decedent's intent when thwarted by scrivener's error. These uses are in addition to the standard retrofitting "opportunities" for disclaimers:

   (a)      appearance of unknown assets;

   (b)      execution by decedent of beneficiary designations inconsistent with the Will or Trust;

   (c)      change in the value of assets or circumstances of the beneficiaries; and

   (d)      qualification of gifts for the marital and charitable deductions.

   This article highlights the use of qualified disclaimers focusing on the law, regulations, and cases after the issuance of T.D. 8744, I.R.B. 1998-7, 20 (Feb. 17, 1998) by the Internal Revenue Service amending the final Treasury Regulations for Section 2518 of the Internal Revenue Code of 1986, as amended (the "Code").

2. THE EFFECT

   When a person makes a qualified disclaimer of an interest in property, the interest is treated for transfer tax purposes as if it had never been transferred to the disclaimant. I.R.C. §2518(a). Under Texas law the disclaimer causes the transfer to relate back to the death of the decedent. §37A(a) of the Texas Probate Code as amended by Acts 2007, 80th Leg., eff. Sept.1, 2007. The so-called "relation-back" doctrine "is based on the principle that a bequest or gift is nothing more than an offer which can be accepted or rejected." Dyer v. Eckols, 808 S.W. 2d 531, 533 (Tex.App.- Houston[14th Dist] 1991,(writ dism'd by agr.). Unlike the applicable credit amount and the annual gift exclusion, there is no dollar limitation on the value of the property disclaimed. The ability to disclaim is not dependent on the identity of the transferor of an interest or the type of property (as long as it is a severable interest) as is required for the marital deduction.

   Pursuant to §37A of the Texas Probate Code as amended by Acts 2007, 80th Leg., eff. Sept. 1, 2007 (the "Probate Code") and §112.010(d) of the Texas Trust Code (the "Trust Code"), the disclaimed property is protected from the claims of the disclaimant's creditors. Notwithstanding, however, a federal tax lien is not defeated by a disclaimer. Drye v. United States, 120 S.Ct. 474 (1999).

3. THE RULES

   But there are rules to qualify for this favored treatment. For disclaimers of interests created after December 31, 1976, §2518 of the Code and Treasury Regulations §25.2518, as promulgated by the Internal Revenue Service in final form in 1986, and as amended in 1998, outline the requirements for a "qualified disclaimer" under the federal tax system. Section 2518 of the Code was enacted by the Tax Reform Act of 1976, to codify the common law and the fragmented statutory provisions of the Internal Revenue Code of 1954, as amended, governing disclaimers before January 1, 1977. Thereafter, two other Acts amended the Code as it relates to disclaimers, The Revenue Act of 1978 (regarding spouse's right to keep an interest), and the Economic Recovery Tax Act of 1981 (allowing certain disclaimers of post-1981 transfers to qualify that failed to meet state law relating to disclaimers). Texas laws that deal with disclaimers are §§37A and 499 of the Probate Code and §112.010 of the Trust Code.

1. Estate Tax Provisions

   Section 2518 of the Code is applicable to the treatment of qualified disclaimers for federal gift tax purposes. The companion statute in Chapter 11 of the Code for treating qualified disclaimers under the federal estate tax rules is §2046. Short and to the point, §2046 reads: "For the provisions relating to the effect of a qualified disclaimer for purposes of this chapter, see section 2518."

   In determining a charitable deduction for estate tax purposes §2055 (a) of the Code provides that the termination of a power (that was not exercised) by the death of the donee-holder before the due date of the estate tax return of the grantor, is deemed a qualified disclaimer for the purpose of qualifying a gift to charity for the charitable deduction. This special provision is not applicable to interests in property that would disqualify the charitable deduction.

   For purposes of the marital deduction, Treas. Reg. §20.2056(d)-2(a) provides that the effect of a disclaimer by the surviving spouse of transfers after December 31, 1976 will be determined by §2518 of the Code and the corresponding regulations.

2. Generation-Skipping Transfer Tax Provision

   Section 2654 of the Code addresses qualified disclaimers subject to the generation-skipping transfer tax. Not as short as §2046 of the Code, because it covers more than disclaimers, paragraph (c) of §2654 of the Code repeats verbatim the language of §2046 of the Code.

3. Pre-1977 Transfers

   The law relating to disclaimers of interests created before January 1, 1977 is summarized in Treas. Reg. §25.2511-1(c)(2). Disclaimers of interests transferred before 1977 must be made in a reasonable time after the disclaimant has knowledge of the transfer, before acceptance of the interests pursuant to an unequivocal and effective disclaimer effective under local law. The determination of the effectiveness of a disclaimer is based on the facts and circumstances in relation to the common law before §2518 of the Code was effective. Practioners must conduct a careful analysis of the cases to determine the effectiveness of a disclaimer of such interests.

4. State Law

   Local law directs how the disclaimed property passes. This is important because disclaimed property must pass without direction by the disclaimant. See Tate v. Siepielski, 740 S.W.2d 92 (Tex. App. – Fort Worth, 1987), where disclaimant attempted (but failed) to assign interest in a qualified disclaimer. For post-1981 transfers, if a disclaimer qualifies under §2518(c)(3) of the Code but is not effective under local law, the disclaimer is nevertheless treated as a qualified disclaimer if the person entitled to the interest has not accepted the interest and timely transfers the entire interest to the person who would have received the interest under a qualified disclaimer. (See Treas. Reg. §25.2518-1(c)(1)(i) for pre-1982 interests.)

1. Decedent's Property

   Under §37A of the Probate Code disclaimed property that is receivable from a decedent's estate passes as if the disclaimant predeceased the decedent, unless the decedent's will directs otherwise. Future interests that would otherwise follow a disclaimed interest take effect as if the disclaiming beneficiary had predeceased the decedent. Tex. Prob. Code §37A. (A copy of the statute effective September 1, 2007 is attached.)

2. Trust Interest

   A disclaimer of an interest in a trust created in any manner other than by will is governed by §112.010 of the Trust Code. Unless the trust terms provide otherwise, the interest disclaimed passes as if the disclaimant had predeceased the transfer, and a future interest takes effect as if the disclaimant had predeceased the transfer. Tex. Trust Code §112.010(d).

3. If Fail to Comply

   Under Texas law, failure to comply with the applicable Texas statute regarding disclaimers renders the disclaimer ineffective except as an assignment to the persons who would have taken if the disclaimer had complied. Tex. Prob. Code §§37A(d); Tex. Trust Code §112.010(e). See Filipp v. Till, ___ S.W.3d __, (App. 14 Dist. 2006) 2006 WL3258701, for the utilization of a disclaimer known to be defective.

4. THE DETAILS

1. Section 2518 of the Code

   A refusal to accept property will be a "qualified disclaimer" for taxation purposes if:

1. the disclaimant or his legal representative makes an irrevocable and unqualified refusal in writing,

2. that is received by the transferor, his legal representative, or the holder of the legal title of the property, not later than 9 months after the later of (a) the day the transfer creating the interest is made, or (b) the day the disclaimant turns 21,

3. provided the disclaimant has not accepted the interest or any of its benefits, and

4. the property passes, without any direction by the disclaimant, to either (a) the spouse of the decedent, or (b) a person other than the disclaimant.

In the delivery of the written disclaimer to the transferor under the Federal rules, if the due date is a Saturday, Sunday or holiday, then the first succeeding day that is not such a day is the date the disclaimer must be received. Treas.Reg. §25.2518-2(c)(2). Further, delivery of the disclaimer under the Federal law may be by mail or other approved delivery services, provided proof of such can be provided. §7502(f) of the Code.

The Regulations to §2518 of the Code add a "person in possession" to the list of persons to whom delivery of the disclaimer may be made. Treas. Reg. §25.2518-2(b)(2).

If these elements are met, the donee is treated as if the interest had never been transferred to him. I.R.C. §2518(a); Treas. Reg. §25.2518-1(b). If the qualified disclaimer is made by a decedent or the decedent's executor, the value of the disclaimed interest will not be included in the decedent's gross estate for federal estate tax purposes. Id.

The statute permits a disclaimer of an undivided portion of an interest. For purposes of §2518 of the Code, an interest in property includes a power with respect to property. I.R.C. §2518(c)(1),(2).

2. Treas. Reg. §25.2518 - General

   The regulations promulgated by the Internal Revenue Service for §2518 of the Code were not finalized until August 6, 1986. But the regulations did not respond to all of the issues that had arisen over disclaimers since §2518 of the Code was added in 1977. Especially troublesome were the disclaimers of joint interests and the application of the rules to any "taxable transfer." The issuance of Action on Decision (AOD) 1990-06 (February 7, 1991) attempted to clarify the joint interest position of the Internal Revenue Service, but in the process raised more and different concerns. Finally, amendments to the final regulations for §2518 of the Code were issued February 17, 1998, effective December 31, 1997. Specifically, the "new" regulations clarified:

1. that §2518 of the Code applies to any transfer, and not just to "taxable transfers;"

2. what constitutes a "transfer" for purposes of determining the starting point of the nine month period in which a disclaimer may be made; and

3. the rules for disclaiming interests held in joint tenancy with right of survivorship or tenancies by the entirety.

3. Effective Date of Regs.

   The introductory provision of Treas. Regs. §25.2518 states the rules are applicable to transfers after December 31, 1976, but paragraph (a)(1) of Section 1 is made applicable for transfers on or after December 31, 1997 by subparagraph (3) of Treas. Regs. 25.2518-1(a).

4. Date of Transfer

   The regulations prior to December 31, 1997 (referred to as the "Prior Regulations") applied to any "taxable transfer." This phrase was a concept introduced in the legislative history of the Committee Reports, not the statute. The Internal Revenue Service used "taxable transfer," not "transfer," throughout the Prior Regulations, which caused confusion and raised questions as to the starting point of the time limit to make a qualified disclaimer. Changes to Treas. Reg. §25.2518 effective for transfers on or after December 31, 1997 (referred to as the "Current Regulations") clarify the applicability of §2518 of the Code and the Current Regulations to any "transfers creating an interest" regardless of whether a tax was imposed. Under the Current Regulations, a disclaimer must be made no later than nine months after the transfer creating the interest, or the day the disclaimant attains age 21. Treas. Reg. §25.2518-2(c). For inter vivos transfers, the "transfer" occurs when there is a completed gift for federal gift tax purposes. For transfers by a decedent at death or that becomes irrevocable at decedent's death, the "transfer" occurs on the date of death of the decedent. Treas. Reg. §25.2518-2(c)(3)(i).

   Accordingly, in the following situations, the date of the transfer will be:

1. foreign-situs property by nonresident alien decedent – date of decedent's death;

2. inter-vivos transfer included in decedent's gross estate – date of gift;

3. general power of appointment (holder) – date power created;

4. interest passing by exercise, release or lapse of general power – date of exercise, release or lapse (holder's date of death);

5. nongeneral power of appointment (as to holder, permissible appointees and takers in default) – date power created;

6. life estate and remainder interest, vested or contingent – date interest created; and

7. disclaimed interest (successors of) – date interest was created in preceding disclaimant.

Treas. Reg. §25.2518-2(c)(3)(i).

Not revised by the Current Regulations were the provisions of Treas. Reg. §25.2518-2(c)(3)(i), sentences 11 and 13, relating to:

1. remainder interest of QTIP – date creating the interest (opposed to date interest is subject to tax under §§2044 or 2519 of the Code); and

2. recipients of interests under age 21 – date of 21st birthday.

Because the date from which a transferee may make a qualified disclaimer is determined by the type of interest, watch for transfers that create more than one interest.

5. Joint Interests

   Probably the most complex provisions of the Prior Regulations were the rules applicable to joint property that were dependent on whether: (1) the interests were unilaterally severable under local law; (2) the consideration furnished by the disclaimant; and (3) the interest included in the estate of the first to die. To simplify, the Current Regulations divide the rules into two categories.

1. Property other than joint bank, brokerage and other investment accounts

   Whether the interest is held in joint tenancy with right of survivorship or tenancy by the entirety, for property other than joint bank, brokerage and other investment accounts the following rules apply:

1. disclaimer of the interest the joint owner acquires upon creation of the tenancy must be made no later than 9 months from the date the tenancy was created;

2. disclaimer of the survivorship interest must be made no later than 9 months from the date of death of the first joint owner to die;

3. the interest of the first joint owner to die is deemed to be one-half unless (d) below applies; and

4. if the surviving joint owner is not a U.S. citizen and the interest was created on or after July 14, 1988, then the survivorship interest that may be disclaimed is any interest includible in the gross estate of the first joint owner to die.

Treas. Reg. §25.2518-2(c)(4).

Example 11 of the Treas. Reg. §25.2518-2(c)(5) is of Husband and Wife in a community property state that purchase real property with community funds. Title to the real property is not held as joint tenants with right of survivorship. Upon Husband's death he leaves his interest in the real property to the Wife, which she disclaims within 9 months of Husband's death. If all other requirements (writing, delivery, no acceptance of Husband's interest and no direction) are met, Wife has made a qualified disclaimer of Husband's interest in the real property. Example 10 of the same regulation illustrates that occupation of real property (100%) that has been disclaimed is not acceptance when the occupancy is consistent with the rights of joint tenants under state law.

2. Joint bank, brokerage and other investment accounts

   Qualified disclaimer of joint bank, brokerage and other investment accounts are subject to the following rules:

1. if the co-tenant can withdraw his contributions to the account without the consent of the other co-tenant, the survivorship interest may be disclaimed nine months from the date of death of the first co-tenant to die; and

2. the surviving co-tenant may not disclaim any consideration furnished by the surviving co-tenant.

The co-tenants of these types of accounts do not have to be spouses. Treas. Reg. §24.2418 – 2(c)(4)(iii).

An example in the Regulations provides that Husband and Wife own an account that the Husband contributed 100% of the funds. At Husband's death the Wife disclaims 40%. The Husband's estate includes 40% of the account as probate assets and 30% as jointly held property includable under §2040(b) of the Code. Treas. Reg. §25.2518-2(c)(5), example (13).

6. Section 37A of the Probate Code

   In Texas, a disclaimer by an individual (or a fiduciary, ad litem, attorney in fact or agent, as permitted) of an interest in property of a decedent is effective when it is:

1. evidenced by an irrevocable written memorandum acknowledged before a notary public;

2. that is filed not later than nine months after the death of the decedent, if the property is a present interest, or nine months after the event finally determining the taker of a future interest (unless the disclaimant is a charity or governmental agency;

3. filed in:

1. probate court if independent administration and less than one year has expired from the date letters testamentary was issued, dependent administration, proceedings have been commenced for administration, or application for administration is pending;

2. county clerk of decedent's residence if administration has been closed, letters testamentary issued more than one year for an independent administration, no will probated or filed for probate, no administration has been commenced, or no application for administration has been filed; or

3. deed records of county clerk where real property or interest is located if decedent is not resident of Texas;

4. with copies delivered to the legal representative of the transferor or the holder of the legal title of the property; and

5. provided the disclaimant, in his individual capacity, has not accepted the property by taking possession or exercising dominion and control of the property.

§37A of the Probate Code requires the notice to be notarized and filed, which are not required under the Federal rules, Unlike the federal statute, there is no comparable Texas requirement that the disclaimed property pass without any direction by the disclaimant. Instead, §37A of the Probate Code states the disclaimed property shall pass as if the disclaimant had predeceased the decedent, unless the will provides otherwise. Another major difference is that §2518 of the Code requires a disclaimer to be filed within 9 months of the creation of the interest, opposed to either the decedent's death or the vesting of the interest under the Texas statute.

Under §37A(m) of the Probate Code, a disclaimer by a surviving spouse of a transfer is not a disclaimer of all or any part of any other transfer from the decedent to the surviving spouse. The disclaimed property or interest can pass to the surviving spouse as a result of the disclaimer or other transfer.

Since the Texas statute relates to property law not tax, there are additional provisions for disclaimers by a charitable organization or governmental agency, and for disclaimers of property from a non-resident decedent. For charitable organizations and governmental agencies the disclaimer must be filed not later the first to occur of the first anniversary of the date the entity receives the notice required by Section 128A of the Probate Code or the expiration of the 6 month period following the filing of the inventory. Tex. Prob. Code §§37A(h).

Property that may be disclaimed under the Probate Code are "all legal and equitable interests, powers, and property, whether present or future, whether vested or contingent, and whether beneficial or burdensome, in whole or in part." Tex. Prob. Code §37A(e). However, burdensome interests can only be disclaimed if such property constitutes a gift which is separate and distinct from undisclaimed gifts. Tex. Prob.Code §37A(l).

7. Section 112.010 of the Trust Code

   Under the Trust Code, an effective disclaimer of an interest in a trust is:

1. an irrevocable and unqualified refusal evidenced by a written memorandum acknowledged before a notary public;

2. delivered to the trustee, the transferor or his legal representative, not later than nine months after the latest of (a) the day the transfer creating the interest is made, (b) the day the disclaimant turns 21, or (c) if a future interest, the date the interest is indefeasibly vested; and

3. conditioned upon the fact that the disclaimant has not accepted any benefits from the trust or exercised dominion and control over the interest.

Like the companion provision in the Probate Code, an interest disclaimed under §112.010 of the Trust Code passes as if the disclaimant had predeceased the transfer, unless the instrument provides otherwise.

8. Claims of Disclaimant's Creditors

   Neither the Code nor the Treasury Regulations specifically protect the disclaimed interest from the claims of the disclaimant's creditors, but some protection may be afforded under local law. A disclaimer that is wholly void or is voided by the disclaimant's creditors under local law it is not a qualified disclaimer under §2518 of the Code. Treas. Reg. §25.2518-2(c)(2).

   Both §37A of the Probate Code and §112.010 of the Trust Code protect the disclaimed interest that complies with state law from the claims of the disclaimant's creditors. One key case illustrating acceptance of a transfer, and therefore ineligible to be disclaimed is in Badouh v. Hale, 22 S.W. 3d 392 (Tex. 2000), where the transferee pledged the interest she expected to receive under her mother's estate as collateral. The property was subject to the beneficiary's creditors. In Drye v. U.S., 120 S.Ct. 474 (1999), the Supreme Court affirmed the decision of the 8th Circuit Court of Appeals that a federal tax lien would not be thwarted by a disclaimer, and the interest could be attached. Treas. Reg. §25.2518-29(c)(2) states that a disclaimer that is wholly void or is voided by the disclaimant's creditors is not a qualified disclaimer.

5. ILLUSTRATIVE RULINGS AND CASES

   The following is a summary of rulings by the Internal Revenue Service and court opinions relating to disclaimers that illustrate the requirements and larger issues relative to this area.

1. Formula Disclaimer

1. Charity Disclaims

   Decedent and Spouse, who are residents in Texas, have a joint Will that leaves everything to Spouse outright, except if Spouse remarries, then one-half will pass to the Child, then her issue, but if no descendants, then to the Charity. The interest passing to the Spouse does not qualify for the marital deduction, and the Decedent's estate exemption is not being used to effectively transfer assets to the Child.

   Spouse, Child and Charity, in accordance with the requirements of the laws of State X, will execute disclaimers of their respective rights to receive property under Decedent's will. Spouse will disclaim all amounts she would otherwise be entitled to receive under the will. Child will disclaim all amounts she would otherwise be entitled to receive under Decedent's will and under §38(b) and 45 of the State X Probate Code (pertaining to intestate succession), except for assets with a value equal to the pecuniary amount needed to increase Decedent's taxable estate to the largest amount that will not result in a federal estate tax being imposed on Decedent's estate. Charity will disclaim all amounts it would otherwise be entitled to receive as a result of Child's disclaimer. It is represented that all of the property of the estate constituted the community property of Decedent and Spouse. It is represented that there is no agreement, expressed or implied, between or among the parties, that any of the disclaimants will be compensated or benefitted in any way in consideration for executing the disclaimers. It is also represented that none of the disclaimants have previously accepted the property or any of its benefits.

PLR 200006052. The IRS ruled that the disclaimers qualified under §2518 of the Code and the interest passing to the Spouse qualified for the marital deduction under §2056(b) of the Code.

2. Percentage of Farm

   Decedent's will leaves everything to surviving spouse. If surviving spouse predeceases, the residuary passes to trust for son. Surviving spouse proposed to disclaim a percentage of the "Home Farm" using the following formula:

...that percentage of the value of the "Home Farm" as finally determined for federal estate tax purposes such that the remaining undisclaimed percentage of the "Home Farm" and the other undisclaimed assets passing to the Spouse by virtue of Decedent's death will be sufficient to result in the lowest federal estate tax being imposed upon the estate after allowing for the unified credit and other allowable credits.

The IRS ruled that the disclaimer described by the formula would be a qualified disclaimer. PLR 9646010.

2. Date of Transfer for Joint Tenancy

   At Decedent's death he owned as joint tenants with right of survivorship real property, two certificates of deposit and four financial accounts. Spouse did not contribute any funds to the assets. Spouse disclaimed within nine months of date of death and before accepting any benefit or interest in the property disclaimed, all of the real property and CDs, and ½ of the financial accounts. "If the transferor may unilaterally regain the transferor's own contributions of the account without the consent of the other cotenant, such that the transfer is not a completed gift under § 25.2511-1(h)(4), the transfer creating the" Spouse's interest occurs at the Decedent's death. PLR 200618017. Accordingly, the disclaimer qualifies.

3. Acceptance

1. Withdraw and Transfer Not Acceptance

   Decedent and surviving spouse owned a brokerage account held as JTWROS. After decedent's death, but before qualifying as executor, surviving spouse withdrew the income from the joint brokerage account and authorized transfer of the joint brokerage account to a new account in his name only. After qualifying as executor, the surviving spouse transferred one-half of the income from the joint brokerage account to an estate account, and one-half of each security in the joint brokerage account to a brokerage account for the estate.

   Surviving spouse disclaimed the survivorship interest in the joint brokerage account, causing decedent's interest to pass to the residuary trust under the will, which the surviving spouse is a beneficiary.

   The Internal Revenue Service reasoned that authorizing the transfer of the joint brokerage account was not acceptance because surviving spouse did not draw on the account or otherwise assert control. Additionally, the withdrawal of the income from the joint brokerage account was not acceptance because none of the funds were used. Further, there was no deemed acceptance by surviving spouse due to local law vesting title immediately at decedent's death. The disclaimer qualifies. PLR 199932042.

2. Disclaimer as to Certain Assets

   Decedent and Spouse equally contribute to a brokerage account that is held as joint tenants with rights of survivorship ("Account"). After Decedent's death, Spouse: transferred title of the Account to Spouse's name, directed the sell of certain securities in the Account, and directed the purchase of securities in the Account. Six months after Decedent's death, Spouse hires an attorney, and by the ninth month after Decedent's death, Spouse disclaims Decedent's share in the Account less the assets in Decedent's share that Spouse accepted benefits (including the earning on such assets).

   After the disclaimer, the account was divided into three accounts, the TIC Account for assets that could not be evenly divided, the Spouse's Account that held Spouse's share including proceeds from securities sold and those purchased, and the Estate Account. Each of the three accounts held their respective earnings since Decedent's death.

   Under Decedent's Will, his residuary estate passes to his revocable trust, the terms of which funds a credit shelter trust with the largest amount that will use in full any estate tax unified credit, then the balance of the residuary goes to the marital deduction trust. Only the credit shelter trust is funded, and the Spouse is to be paid income quarterly and principal distributions to the Spouse and children based on HEMS.

   The IRS ruled the disclaimer was qualified. "Acts indicative of acceptance include using the property or the interest in property; accepting income from the property; and directing others to act with respect to the property or interest in property. Merely taking delivery of an instrument of title, without more, does not constitute acceptance." PLR 200503024.

4. Transfer Prior to 1977 and Exempt GST Trust

   Grandmother died testate before 1977, creating a trust for mom that gave mom a power of appointment. Mom exercised the power in favor of a trust created under mom's will, of which daughter is a beneficiary.

   Daughter decides to disclaim a fraction of the property transferred to said trust. (The date daughter learned of the transfer, the effective date of the disclaimer and the date the disclaimer was delivered to the trustee are not specified in the ruling.)

   Referring to Treas. Reg. §25.2511-1(c)(2) and Jewett v. Commissioner, 455 U.S. 305 (1982), the IRS ruled that daughter's disclaimer was effective because it was made within a reasonable time after she had knowledge of the transfer.

   Grandmother's trust was grandfathered under the GST rules because it was irrevocable on September 25, 1985. The exercise of the power by mom did not cause the trust to be subject to the GST tax. PLR 199945010.

5. Pecuniary Amount by Formula and GST

   By her will, grandmother gave specific shares of stock and proceeds of a bank fund to a trust for the benefit of grandson. The residuary estate passed to daughter.

   Grandson disclaimed so much of the trust property, valued as of grandmother's death, that was in excess of grandmother's available GST exemption, together with the income and increase attributable to the property. The disclaimer was delivered to the executor within nine months of grandmother's death, and no interest in the trust was accepted by the grandson before the disclaimer. The disclaimed property passed to the residuary estate for the benefit of daughter.

   The IRS ruled that the grandson's disclaimer qualified as a disclaimer of a severable interest. The disclaimed amount passed to daughter (a non-skip person), so the disclaimed interest is not subject to GST tax. Grandson's trust has an inclusion ratio of zero for purposes of the GST tax. PLR 200001045.

6. Sever Trust to Qualify for Marital Deduction

   Decedent's will makes a gift of the residuary to a trust for the benefit of surviving spouse and decedent's descendants. Executor proposes to sever the trust and create two trusts with terms identical to the original trust.

   Decedent's descendants will disclaim their interest as current beneficiaries of one of the trusts, which will be known as the marital trust.

   If the proposed disclaimers are delivered within nine months of the decedent's death, the disclaimers will qualify under §2518 of the Code and the marital trust will satisfy the requirements of §2056(b)(7) of the Code. PLR 199949023.

7. Unqualified Disclaimer Is Addition to Grandfathered GST Trust

   Grandfather created a trust that benefitted his wife for her life, then son and his children. After grandfather's death, son and three of his children enter into a "Disclaimer and Modification of Trust Agreement." Son attempted to disclaim his interest in the trust in that agreement.

   Citing Treas. Reg. §25.2518-2(c)(3), the IRS ruled the son did not disclaim within nine months from the date of the transfer creating his interest, which with respect to grandfather's inter vivos transfer into trust, was grandfather's date of death. Son's disclaimer was not qualified, thus the action by son was treated as a completed transfer subject to gift tax.

   Because the interest son disclaimed was subject to gift tax, the value of the interest is treated as an addition to the trust after September 25, 1985, and accordingly a pro rata portion of all subsequent distributions from the trust will be subject to the GST tax. PLR 200001012.

8. No Extension for QTIP Election for Interests Subject to Nonqualified Disclaimer

   Attempting to cause a portion of Decedent's estate to pass to the Decedent's children (bypassing the marital deduction trust and the credit exemption trust), disclaimers were executed by two of Decedent's children in their capacity as attorneys-in-fact for the Decedent's spouse. The estate tax return was filed making a QTIP election for the property passing to the marital deduction trust, specifically excluding the disclaimed property. Later it was determined the disclaimers were invalid, so according to the funding formula of the marital deduction trust, the "disclaimed" property was distributed to the marital deduction trust. The executor requested a ruling that the QTIP election covered "disclaimed property," but if not, that an extension of time under Treas. Reg. §301.9100-3 would be granted to make an amended QTIP election .

   The IRS concluded that the QTIP election on the estate tax return as filed did not cover the disclaimed property "because the property that was purportedly disclaimed was not among the other specifically listed properties on Schedule M…." As to the request for relief under Treas. Reg. §301.9100-3, the IRS determined the taxpayer was "seeking to change a previously made QTIP election to include additional property" rather than time to make the election. Accordingly, relief was not applicable in this case. PLR 200612001.

9. Fractional Portion Together with Any Income

   Decedent's will created a trust for surviving spouse funded with decedent's "remaining stocks, bonds and marketable securities." The trust paid surviving spouse all of the income and so much of the principal as the trustee determined necessary. At surviving spouse's death, the trust estate was to be distributed to decedent's children.

   At decedent's death he had an outstanding margin account with a brokerage firm. The executor was reducing the debt by selling securities, and it was anticipated the margin account would be satisfied.

   Surviving spouse proposes to disclaim 2/3 of her interest in the trust, together with the income. The disclaimed amount will pass to the children in accordance with the terms of the trust and local law.

   Observing that surviving spouse's disclaimer of undivided fractional portion of her interest in the trust is similar to the qualified disclaimer of a percentage of a beneficiary's interest in a trust described in Example 5 of Treas. Reg. §25.2518-3(b), the IRS determined that the disclaimer will qualify under §2518 of the Code. PLR 200045026.

10. Qualified Plan and QTIP Trust

    Decedent named surviving spouse the primary beneficiary of his 401K Plan and the trustee of the QTIP trust created under Decedent's management trust as the contingent beneficiary. The trustee of the QTIP trust is required to pay the net income of the trust, and all the income portion of any installment from any plan, to the surviving spouse. The surviving spouse has a testamentary special power of appointment over the trust.

    Surviving spouse proposes to disclaim her interest as the primary beneficiary of the 401K Plan, and the power of appointment. The trustee will segregate the assets of the Plan from the other assets in the QTIP trust. Surviving spouse will not serve as trustee of the QTIP trust. Although local law allows disclaimers up to 12 months from the transfer, surviving spouse will disclaim within the time limitation of §2518 of the Code. The IRS concluded that the disclaimers qualify, and the 401K Plan qualifies for the marital deduction. PLR 200105058.

11. One for the Debtor

    Niece inherited an interest in property under aunt's will. In accordance with Texas law, niece filed a timely disclaimer. Niece owed the IRS nearly $20,000 at that time.

    The court found that "state law determines whether a taxpayer has a property interest to which a federal lien may attach," not §6321 of the Code. Under local law, the bequest was an offer which, if disclaimed, was never a property right of the donee to which the federal tax lien could attach. The court held that niece never had a property interest subject to the lien. Leggett v. U.S., 120 F.3d 592 (5th Cir. 1997).

    However, the Supreme Court determined in Drye v. U.S., 120 S.Ct. 474 (Dec.7, 1999), that "the absence of any recognition of disclaimer…in the relevant tax collection provisions, contrasts with §2518(a) of the Code, which renders qualifying state-law disclaimers…effective for federal wealth-transfer tax purposes and for those purposes only."

    Finding that the power to channel property by the disclaimer was property subject to the tax lien, and that there was no exception for inheritances under §6334(a) of the Code, the Supreme Court held that state disclaimer law based on the relation back doctrine was inoperative to prevent the federal lien from attaching to the taxpayer's inheritance.

    The Court in In Re. Schmidt, 362 B.R. 318, (Bkrtcy. W.D. Tex., 2007), determined a debtor in bankruptcy could not disclaim an inheritance after filing her Chapter 7 petition. Once the petition was filed, the Chapter 7 trustee alone had control over the property of the bankruptcy estate, which included the inheritance.

12. Expectation is Not Consideration

    Surviving spouse was disturbed when he found out that the 29 specific cash bequests made by his wife under her will would be significantly reduced by death taxes and in some cases GST tax. Determined to reduce the burden, surviving spouse talked to the beneficiaries about executing disclaimers. All 29 disclaimed. In December 1989 and January 1990, surviving spouse made gifts to each of the disclaimants in approximately the same amount as the bequest under his wife's will. The IRS disallowed the marital deduction on the wife's 706 in the amount of the disclaimers, and charged the estate with GST tax, determining the disclaimers were invalid.

    Ruling in favor of the IRS, the Tax Court found an implicit agreement between the surviving spouse and the beneficiaries, which was consideration for the disclaimers and thus the disclaimers failed to meet the requirements under §2518 of the Code.

    Reversing the Tax Court in part and remanding for further determination, the Fifth Circuit Court of Appeals found that the fact surviving spouse made gifts after the disclaimants renounced their bequests was not consideration that disqualified the disclaimers. "A mere expectation of a future benefit in return for executing a disclaimer will not render it 'unqualified'." Monroe v. Commissioner, 124 F.3d 699 (5th Cir. 1998).

13. Expectancy as Security is Acceptance

    Daughter signed a deed of trust that included her expectancy of inheritance from her mother. After mother's death, daughter disclaimed her interest in the estate and asserted the property was not subject to the claims of her creditor.

    The Court disagreed, holding that by executing the deed of trust, daughter had exercised dominion and control over the property she inherited from her mother, and thus had accepted the interest. The disclaimer was not valid. Badouh v. Hale, 22 S.W.3d 392 (Tex. 2000).

14. Valuation

    Surviving spouse disclaimed part of the interest in stock given to her under husband's will. As a result, the surviving spouse had a minority interest in the stock. The Court concluded that the marital deduction would be based on the value of the shares to which the surviving spouse was entitled after the disclaimer. DiSanto v. Commissioner, 78 T.C.M. (CCH) 1220.

15. Intestate

    Son died intestate and under state law certain interests passed to son's father. Father disclaimed and the interest passed to son's wife, qualifying for the marital deduction. The IRS asserted consideration was given by the wife in exchanged for the disclaimer.

    The Court found the disclaimer was qualified, and awarded attorneys' fees and costs to the wife. Estate of Lute by Lane v. United States, 19 F. Supp. 2d 1047 (D. Neb. 1998).

16. Retrofitting for Marital Deduction

    Decedent died with a 1970 will that was sorely out of date with the decedent's assets, family situation and tax laws. The executor used disclaimers to qualify the gift to the residuary trust for the marital deduction. The Court held the trust qualified. Lassiter v. Commissioner, 80 T.C.M. (CCH) 541 (2000).

17. Good Intentions

    Taxpayer asserts that his handwritten, unsigned schedule of assets and the probate inventory are qualified disclaimers. The attorney for taxpayer drafted a disclaimer, but it remained unsigned and apparently unread by the taxpayer. Taxpayer argues his intent was clear and that the doctrine of substantial compliance should be applied.

    The Court found that the statute requires "an irrevocable and unqualified refusal, expressed in writing, to accept an interest in property." Such

    "a design avoids arguments about undisclosed intentions and unexpressed election of choices." The Court affirmed the Tax Court's decision that taxpayer failed to make a qualified disclaimer. Chamberlin v. Commissioner, No. 00-70291, 2001 U.S. App. LEXIS 10911 (9th Cir. 2001).

18. Assignment

    Following the birth of their stillborn child, husband and wife sued the attending physician. During the pendency of the matter wife died intestate. Two years after wife's death, husband disclaimed his interest in wife's cause of action in a document that also "assigned" the interest to the couple's child.

    The court hearing the malpractice suit ruled the alleged disclaimer did not meet the requirements of local law because it was not filed within nine months of wife's death, but was effective as an assignment to the child. Krishnan v. Ramirez, 42 S.W.3d 205 (Tex.App. – Corpus Christi 2001).

19. Disclaimant as Fiduciary of Charity

    The subsequent beneficiary of disclaimed property was a charitable foundation of which the disclaimant was a trustee. Concerned that her discretionary power to make distributions of the foundation assets would be deemed an acceptance, the disclaimant and the co-trustees segregated the disclaimed property and amended the terms of foundation to prohibit the disclaimant from exercising any authority over the assets. Citing the regulations, the IRS ruled the disclaimer was valid where the fiduciary only exercised his powers to preserve or maintain the disclaimed assets in the foundation, and had no discretionary power to direct the enjoyed thereof. PLR200149015.

20. Spouse Retains Interest After Two Generations Disclaim

    Decedent's Will distributed the residue to inter vivos trust, which at his death funds a marital trust with a pecuniary amount and the balance to a family trust to be distributed outright to the descendants, or if none of the descendants survive, then to Spouse. The surviving family members (children and grandchildren, both adults and minors), gave otherwise qualified disclaimers with "no express or implied agreement between or among the disclaimants or Spouse that the interests proposed to be disclaimed will be given to a person or persons specified by any of the disclaimants." Note the minor grandchildren disclaimed via their guardian appointed by the court. The IRS concluded the disclaimers qualified, and the interest passed to the Spouse qualified for the marital deduction. PLR 200626002.

21. Donor's Advised Fund

    Grandchildren propose to disclaim certain interests under Decedent's Will, and such disclaimed interests in accordance with the Will are to be distributed to a Trustee of a sub-fund for each disclaimant grandchild under an agreement establishing a fund. Distinguishing Rev. Rul. 72-552, 1972-2 C.B. 525 regarding inclusion of interests in a decedent's estate of property the decedent had the power to direct who would possess or enjoy, from the facts of the Ruling by the grandchildren's right to only make advisory recommendations to the Foundation that might be accepted or rejected, the disclaimers were ruled to have qualified. PLR 200518012.

22. IRA Disclaimed by Personal Representative

    Husband was owner of an IRA. Wife survived Husband but died shortly thereafter. The personal representative of the Wife's estate disclaimed Wife's interest after securing a judicial reformation of the beneficiary designation for the IRA to name the couple's children as contingent beneficiaries of the IRA. The personal representative was one of the children. The IRS concluded the disclaimer to be valid. PLR 200616041.

    For an excellent discussion coupled with samples of the use of an IRA to fund the bypass trust, see Karen Gerstner's "The Pros and Cons of the Bypass Trust as the IRA Beneficiary" presented at the 30th Annual Advanced Estate Planning and Probate Course, June 2006.

6. ATTORNEY'S RESPONSIBILITY

   In New Jersey, an attorney was found not to have a duty to advise the surviving spouse regarding post-mortem planning in relation to her husband's estate. The court held the attorney's responsibilities were limited to representation of the surviving spouse in her capacity as executor of the estate pursuant to the retainer agreement. Fitzgerald v. Linnus, 765 A.2d 251 (N.J. Super. Ct. App. Div. ___).

7. CONCLUSION

   By trade, an estate planner is a "forward thinker." But occasionally, the planner must consider what would have happened "if only…." The time to look back to what might have been is brief (unless you have a pre-1977 transfer, then the time period is limited to what is "reasonable"). When a transfer is effectuated by death, gift or renunciation, calculate the result of the transfer as originally planned, as well as the result if the beneficiary did not accept. By the use of a disclaimer to "back-up" and make the transfer as if the original recipient had deceased the transferor, you will have a different, and presumably better result for your clients.