Wednesday April 24, 2024

1.3.5 Disclaimers

Disclaimers

Disclaimer Requirements:  A beneficiary of an estate may disclaim property.

Disclaiming to a Qualified Charity:  If the document includes a qualified charity as a contingent beneficiary or as a beneficiary of part or all of the residue of the estate, then it is possible to obtain a charitable estate tax deduction.

Disclaimer Drafting:  Given the past uncertainty surrounding estate planning after the enactment of EGTTRA 2001, disclaimers have been very widely used.

Disclaimer Requirements

A beneficiary of an estate may disclaim property. If the disclaimer is valid, the assets will pass to a contingent beneficiary or to the residue of the estate.

A disclaimer has four specific requirements. It must be in writing, the executor must receive the disclaimer within nine months after the date of death of the decedent, the disclaiming person must not have accepted any benefits from the disclaimed property and the property must pass to a person other than the disclaiming party. There is one exception to the fourth requirement - a surviving spouse may disclaim to a trust and still receive other benefits from that trust. Reg. 25.2518-2(c).

Disclaiming to a Qualified Charity

If an estate planning document includes a qualified charity as a contingent beneficiary or as a beneficiary of part or all of the residue of the estate, then it is possible to obtain a charitable estate deduction. The beneficiary under the will or trust must execute a valid written disclaimer within the nine month period. If the disclaimer is appropriately completed, the originally named recipient is disregarded for estate tax purposes and the assets are transferred to charity, effective as of the date of death of the decedent. Sec. 2518(c)(3). The value of the transfer to charity will qualify as a charitable estate tax deduction.

Disclaimer Drafting

Given the past uncertainty surrounding estate planning after the enactment of EGTRRA 2001, disclaimers have been very widely used. One of the excellent benefits of a disclaimer planning strategy is flexibility. For example, if a surviving spouse is named to receive assets with the option to disclaim into a bypass trust, then he or she will be able to determine the best funding level for the bypass trust after the first spouse has passed away. Depending on the size of the estate and the value of the applicable exclusion amount at the date of death, it may be desirable to fund the bypass trust with less than the full amount of the applicable exclusion at that time.

Similarly, in the second estate, it is wise to place a contingent transfer to a qualified charity in the plan. With this option, children, grandchildren and other heirs will be able to make transfers to charity and qualify the disclaimed property for charitable estate tax deductions. There is nothing lost by drafting a provision for a contingent transfer. Instead, it provides the family with flexibility. Since it is difficult to know whether an estate will be subject to estate tax, or even whether there will be an estate tax as of date of death, there is logic in providing this planning flexibility to family members.

Private Letter Rulings

PLR 200204022 Disclaimer of CRUT Interests by Children Entitles Estate to Marital Deduction:   Husband and Wife created a four-life charitable remainder unitrust (CRUT). The CRUT was drafted to pay first income to Husband and Wife. After both passed away, the CRUT payout was to be made to Son and Daughter.

PLR 200420007 Qualified Disclaimer Preserves Tax Deduction:   When Petrina Parent died, the residue of her trust was distributable to her child Chester. In the event of a disclaimer by Chester, the trust provided for distribution of the disclaimed property to the Petrina Foundation (the "Foundation"). Chester is a director of the Foundation and exercises discretion to direct qualified distributions from the Foundation. Chester proposed that he disclaim a fractional share of the trust residue. Is Chester's disclaimer a "qualified disclaimer?"

TAM 200437032 No Estate Deduction with "Vow of Poverty" Heir:   In TAM 200437032, the Service determined that a bequest to a member of a religious order would not qualify for a charitable deduction, even though the member was under a vow of poverty.

PLR 200616026 Valid Disclaimer Entitles Estate to Charitable Deduction:   D died survived by child T. Under D's will, the residuary of D's estate was to be held in trust for D's surviving descendants. If none of D's descendants survived him, D's residuary estate was to pass to F, a Sec. 509(a) private foundation.

PLR 200649023 Private Foundation Disclaimer Deduction:   D passed away leaving his spouse, son and daughter as survivors. D's will transferred the residue of his estate to revocable trust T. D's son and daughter were appointed co-trustees of T. T provided for payment of X dollars for the use and benefit of one or more qualified persons as appointed by D's daughter.

PLR 200744005 Disclaimer Creates Valid Estate Charitable Deduction:   Upon Decedent's death, the residue of his estate passed to Trust. Trust contained a provision that one-third of the trust assets were to be distributed to X, except if X were to disclaim the property, then the one-third share would pass to Foundation, a tax-exempt 501(c)(3) classified as a private foundation under Sec. 509(a).

PLR 200802010 Disclaimed Property Qualifies for Estate Tax Charitable Deduction:   D passed away survived by two daughters, D1 and D2. D's will provides that the residue of his estate pass to a Trust for the benefit of his children, but if either daughter disclaims her share of Trust property, the property is then distributed to a private foundation established by the disclaiming daughter.

PLR 201208005 Disclaimers Valid, No GSTT:   Decedent is survived by Spouse, Adult Child and Grandchild. Decedent's estate plan calls for Spouse to receive a grantor retained annuity trust (GRAT) and Decedent's trust to receive the remainder of the probate estate, including decedent's share of property owned jointly with Spouse.
PLR 201403005 IRS Rules on Gift Tax Consequences of Proposed Disclaimers:   Donor created Trust 1 and A created Trust 2. Both trusts were created prior to January 1, 1977. D is the child of A and the parent of Taxpayer, who has not attained the age of majority.

PLR 201845002 IRS Rules on Gift Tax Consequences of Proposed Disclaimers:   Donor created two trusts. At the time the trusts were created, Donor had three children (A, B, and C). A's child, D, was born after the trusts were executed.

Related Topics on Disclaimers

Christiansen:    In Estate of Helen Christiansen et al. v. Commissioner; 130 T.C. No. 1; No. 15190-05 (24 Jan 2008), the Tax Court determined that a disclaimer of part of an estate into a charitable lead trust did not qualify for a charitable deduction.

Tatum:    In Estate of Franklin M. Tatum, Jr. et al. v. United States; No. 2:09 cv-00048 (6 Oct. 2010), the District Court determined that a disclaimer was not effective to transfer the intended property.

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