Disclaimers. Paul N. Frimmer

Transcription

1 Disclaimers Paul N. Frimmer Paul N. Frimmer specializes in estate planning, wills and trusts, probate and trust administration, postmortem tax planning, probate litigation, art law, charitable giving and tax issues relating to these matters. He has authored and co-authored more than 50 publications on estate planning and related areas. He is also a frequent speaker at national and local estate planning seminars and institutes, including the NYU Tax Institute, the USC Tax Institute, the University of Miami Estate Planning Institute, ALI- ABA seminars, the USC Probate and Trust Institute, and the UCLA Estate Planning Institute. He can be reached at pfrimmer@ loeb.com. A. Federal Definition of Qualified Disclaimer After Tax Reform Act of 1976 And Revenue Act of Internal Revenue Code (I.R.C.) Note that references to Reg. refer to final regulations published on August 7, 1986; references to Prop. Reg. refer to proposed regulations published on July 22, A qualified disclaimer is an irrevocable and unqualified refusal to accept an interest in property, if: a. The disclaimer is in writing, I.R.C. 2518(b)(1); Reg (b)(1) (a written disclaimer made by disclaimant s attorney acting on oral instruction was valid. Allen v. Comm r, 56 T.C.M. (CCH) 1494 (1989), (disclaimer may be made by attorney under durable power of attorney); Delaune v. U.S.,143 F.3d 995 (5th Cir. 1998), cert. denied, ALI-ABA Estate Planning Course Materials Journal 17

2 18 ALI-ABA Estate Planning Course Materials Journal August U.S (1999); Chamberlain v. Comm r, 177 T.C.M. (CCH) 2080 (1999), aff d in an unpublished opinion, 9 Fed. Appx. (9th Cir. 2001)); Priv. Ltr. Rul (beneficiary s death before signing disclaimer was not qualified disclaimer); b. It is made and delivered within nine months of the creation of the interest (subject to an exception for persons under age 21 and subject to an extension until September 17, 2011, for testamentary transfers that occurred in 2010). I.R.C. 2518(b)(2); Reg (b)(2) and (c); c. There has been no acceptance of the interest or benefits, I.R.C. 2518(b)(3) (residing in community property residence/farm during lifetime of both spouses did not preclude surviving spouse from disclaiming deceased spouse s interest in the residence/farm. Priv. Ltr. Rul , citing Prop. Reg (d) (1)). See also Reg (d); Priv. Ltr. Ruls , , ; and d. As a result of the disclaimer, the interest passes to the surviving spouse or to a person other than the disclaimant without any direction on the part of the disclaimant. I.R.C. 2518(b)(4)(A) and (B); Reg (e). 2. As long as the disclaimer becomes irrevocable before the expiration of the nine-month period, it will be a qualified disclaimer. See Priv. Ltr. Ruls , , (N.Y. law). A rescission of a disclaimer based on mistake of law was not permitted in Webb v. Webb, 301 S.E.2d 570 (W.Va. 1983), or Holden v. Holden, 520 S.E.2d 322 (S.C. Ct. App. 1999), aff d, 539 S.C. 703 (S.C. 2000). But see Breakiron v. Gudonis, U.S. Tax Cas. (CCH) 60,597 (D. Mass. 2010). See also E. Lange v. Comm r, 96-2 U.S. Tax Cas. (CCH) 60,244 (1996); Estate of Paul Ciaffoni, 787 A.2d 971 (Pa. Super. 2001); Priv. Ltr. Rul An unfiled disclaimer in a state that requires filing to be effective may be withdrawn. Estate of Overgard, 5 Misc.3d 628, 785 N.Y.S.2d 662 (N.Y. Sur. Ct. 2004). 3. I.R.C does not apply to interests created before December 31, Tax Reform Act of 1976, section 2009(e)(2) (TRA 1976); Reg ; Priv. Ltr. Ruls , , , , , , Declaratory judgment on validity of proposed disclaimer is not available. Ingham v. Hubbell, 462 F. Supp. 59 (S.D. Iowa 1978). The Internal Revenue Service (Service) will not rule on the timeliness of a disclaimer under pre-tra 1976 law. Rev. Proc. 72-9, C.B. 718, item 18, section 3.01, superseded by Rev. Proc , C.B. 496; Priv. Ltr. Rul A disclaimer conditioned on receipt of a favorable ruling will not be qualified. See Gen. Couns. Mem (July 12, 1963), referred to in Gen. Couns. Mem (Aug. 10, 1964). a. According to the regulations, I.R.C will apply to taxable transfers occurring after December 31, Reg (a), (c)(2) and (3); Priv. Ltr. Ruls , , , , , , , b. A disclaimer of an interest created by a post-1976 exercise of a general power of appointment created by a pre-1977 irrevocable trust must comply with I.R.C See Reg (c)(2) and (3); Priv. Ltr. Rul

3 Disclaimers 19 c. A disclaimer of an interest created by a post-1976 lapse of a general power of appointment created in a pre-1977 marital trust must comply with I.R.C See Reg (c)(2) and (3); Priv. Ltr. Rul d. A beneficiary taker in default of the exercise of a general power of appointment must disclaim within nine months of the power holder s death. Reg (c)(3); Priv. Ltr. Ruls , , , (disclaimers of remainder of a GRIT allowed within nine months of grantor s death when grantor retained a general power if grantor died before GRIT term). e. A disclaimer of an interest created by a post-1976 exercise of a pre-1977 limited power of appointment was not governed by I.R.C Priv. Ltr. Rul f. For the consequences of a disclaimer of a pre-1972 general power of appointment, see Priv. Ltr. Rul A qualified disclaimer relates back to the date of the transfer. See Priv. Ltr. Rul This rule has produced interesting results: in Rev. Rul , C.B. 234, a surviving spouse s disclaimer of an income interest in a trust resulted in the loss of the marital deduction even though the executor of the estate made an earlier election under I.R.C. 2056(b)(7). In Priv. Ltr. Rul , however, a surviving husband s exercise of a general power of appointment in a trust created by his predeceased wife precluded the husband s executor from disclaiming the power. When does the exercise of a testamentary power occur: at the time the will is written or at the moment of death? See Reg (c)(5), Example (7); Pennsylvania Bank and Tr. Co. v. U.S., 451 F. Supp (W.D. Pa. 1978), aff d, 597 F.2d 382 (3d Cir. 1979, cert. denied, 444 U.S. 980 (1979). 5. If property is subject to tax as a result of a qualified disclaimer, it is eligible for the credit for tax on prior transfers. I.R.C B. Economic Recovery Tax Act Of 1981 (ERTA) Changes In I.R.C I.R.C. 2518(c)(3) is added to treat as a qualified disclaimer: a. A written transfer of the transferor s entire interest in property; b. Which meets the requirements similar to the requirements of I.R.C. 2518(b)(2) and (3); and c. Which is to a person who would have received the property had the transferor made a qualified disclaimer (within the meaning of I.R.C. 2518(b)). 2. I.R.C. 2518(c)(3) is effective for transfers creating an interest in the disclaimant after December 31, 1981.

4 20 ALI-ABA Estate Planning Course Materials Journal August Regulations for I.R.C. 2518(c)(3) are expected shortly. T.D. 8095, Supplementary Information to Final Regulations on Section The first judicial discussion of I.R.C. 2518(c)(3) appears in Dancy Estate v. Comm r, 89 T.C. 550 (1987), rev d, 872 F.2d 84 (4th Cir. 1989), which held that a disclaimer that did not specifically transfer an interest in property did not come within the statute. C. Federal Gift Tax Aspects 1. If the disclaimer is a qualified disclaimer under I.R.C. 2518, it is not a gift for federal tax purposes. Reg (b); Priv. Ltr. Rul A nonqualifying disclaimer of an interest in a QTIP trust was a net gift. Priv. Ltr. Ruls and Under pre-tra 1976 law, the interaction between federal and state disclaimer rules was unclear. For example, Reg (c) (pre-tra 1976) provides that a disclaimer will not result in a taxable gift if the disclaimer is valid under local state law and if the disclaimer is made within a reasonable time after the disclaimant learns of the transfer. See Priv. Ltr. Ruls , , , , a. Although a disclaimer made within the applicable state time period was almost always conclusively held to be made within a reasonable time for federal gift tax purposes, it was possible that a disclaimer which was valid under state law would not be timely for federal gift tax purposes. See Kathryn S. Fuller v. Comm r, 37 T.C. 147 (1961); Connecticut Bank & Tr. Co. v. U.S., 439 F.2d 931 (2d Cir. 1971); Rev. Rul , C.B. 292; Priv. Ltr. Ruls and b. Pauline Keinath v. Comm r, 58 T.C. 352, rev d, 480 F.2d 57 (8th Cir. 1973), injected further uncertainty into the law of disclaimers with conflicting opinions: i. Keinath used a federal standard for determining a reasonable time within which to disclaim but used state court decisions to determine the effectiveness of the disclaimer. See Covey, Recent Developments Concerning Estate, Gift and Income Taxation 1973, 8 U. Miami Inst. on Est.Plan , for a discussion of the Keinath decision. See also Newman and Kalter, Disclaimers of Future Interests: Continuing Problems and Suggested Solutions, 49 Notre Dame Law. 827 (1974); ii. The Keinath case was a primary reason for the enactment of I.R.C See Report of Committee on Ways and Means to Accompany H.R , H.R , 94th Cong., 2d Sess., 66 (1976); iii. The Keinath problem seems to be settled by the Supreme Court in Jewett v. Comm r, 455 U.S. 305, (1982), although the opinion is far from clear on all of the issues. See also Griswold v. Comm r, 81 T.C. 141 (1983); Priv. Ltr. Rul ; iv. Jewett is inapplicable to transfers occurring before the enactment of the gift tax. But see Irvine v. U.S., 818 F. Supp. 272 (D. Minn. 1989), aff d, 981 F.2d 991 (8th Cir. 1992), rev d, 511 U.S. 224 (1994), which holds that a disclaimer may be a taxable gift if the interest (but not the disclaimer) was created

5 Disclaimers 21 before the gift tax. See also Ordway v. U.S., 908 F.2d 890 (11th Cir. 1990), cert. denied, 501 U.S (1991); v. Disclaimer of a pre-1976 contingent interest was allowed 39 years after the interest was created when the disclaimant disclaimed within nine months of knowledge of the interest. Priv. Ltr. Ruls and See Hollenbeck, T.C.Mem See also Priv. Ltr. Rul , , , , , , , , , , , , , Although I.R.C as originally enacted did not address the issue specifically, the Service s position has been that a disclaimer must satisfy the requirements of both I.R.C and applicable state law. Prop. Reg (c); Priv. Ltr. Ruls , , , , , , But see Priv. Ltr. Rul See Frimmer, Disclaimers After the Tax Reform Act of 1976: Chaos Out of Disorder, 31 U. S.Cal. Inst. Tax 811 (1979); Frimmer, Using Disclaimers in Post Mortem Estate Planning: 1976 Law Leaves Unresolved Issues, 48 J. Tax n 322 (1978). 4. The state law problem was supposed to be solved by I.R.C. 2518(c)(3) (the transfer disclaimer), but I.R.C. 2518(c)(3) is poorly drafted and causes additional problems. When regulations are issued, many of the problems may be eliminated. a. To whom should the property be transferred in the absence of state law? See Tech. Adv. Mem Suppose state law is unclear? See Estate of Franklin M. Tatum, Jr. v. U.S., 2010 WL (S.D. Miss. Oct. 6, 2010); Priv. Ltr. Rul for illustrations of the importance of state law. b. What is an entire interest for purposes of I.R.C. 2518(c)(3)? i. Does this requirement mean that a surviving spouse cannot retain an interest after a transfer disclaimer as he or she can after a normal disclaimer? ii. Does the undivided portion language of I.R.C. 2518(c)(1) apply to a transfer disclaimer? See Joint Committee on Taxation General Explanation of ERTA, published on December 29, 1981 ( Blue Book ), p c. How similar does the transfer disclaimer have to be to the requirements in I.R.C. 2518(b)(2) and (3) to be valid? d. Can a fiduciary who could not disclaim under state law take advantage of the transfer disclaimer? See pre-erta Priv. Ltr. Ruls (disclaimer invalid because Kansas law did not authorize fiduciary disclaimers) and ; post-erta Priv. Ltr. Rul (Tex. law). See also Rev. Rul , C.B. 209.