Christopher Stoneman Estate Planning Articles

X - Disclaimers

If flexibility is an ingredient of sophisticated estate planning, familiarity with the disclaimer is a must.  Like the power of appointment, which we have already discussed, the disclaimer may, if thoughtfully used, give yet another opportunity for “second look” planning in arranging - “rearranging” might be a more accurate term - the devolution of a decedent’s estate.

                                              ___________

     Black’s Law Dictionary (6th ed.) defines a disclaimer as:
               The refusal, or rejection of an estate or right offered to a person.

We will examine the requirements for an effective disclaimer both under Vermont law (14 V.S.A. Sections 1951-1959)* and under the federal statute (I.R.C. Section 2518) and its accompanying regulations.  After that we will look at some examples of situations where the  thoughtful fiduciary may be prompted to recommend to his beneficiaries that a disclaimer  may have a positive result - regardless of whether the estate-planning adviser actually had such a possibility in mind.

_____
*  The Uniform Disclaimer of Property Interests Act.

     1.  State law requirements.  The Vermont statute applies to any person (including the representative of a deceased, incapacitated or protected person) to whom “any property or interest devolves.”  The disclaimer must be in writing signed by the disclaimant, describing the property or interest being disclaimed and the extent of the disclaimer (Section 1953).*
     Timeliness.  Section 1952 prescribes a series of rules dealing with the periods within which disclaimers must be made and the persons to whom they must be delivered in order to be effective.

A.  Property or interests passing under wills or by virtue of intestacy (Section 1954(a)).
In cases involving wills or intestacy there are two different rules: that which applies to so-called present** interests, and that governing future*** interests.  A present interest must be disclaimed within nine months of the death of the deceased owner (or, in the case of a power of appointment, the death of the donee**** of the power).  In the case of disclaimer of a future interest, this must be undertaken not later than nine months after the event determining that the property or interest has become finally determined and his interest is a “indefeasibly vested.”

_____
               *   A disclaimer may be partial, e.g., limited to a part of the gift rather than the whole gift.
               **  I.e., interests which entitle their owners to immediate possession of the underlying property.
               ***  I.e., interests where possession or enjoyment is in the future, after the passage of time or the occurrence of
               some event, and not present.
               ****  The holder of the power of appointment.

B.  Property or interests passing under a nontestamentary instrument or contract (Section 1954(b)).  As to a present interest, the disclaimer period is nine months after the “effective date” of the instrument or contract in question.  Where the interest is a future interest, the period (as in the case of wills or intestacy) is nine months after the event determining that the taker of the property has become finally ascertained and his interest is “indefeasibly vested.”

If the person entitled to disclaim an interest does not have actual knowledge of the interest, the nine-months period does not begin until the disclaimant has actual knowledge of the interest’s existence.

C.  Disclaimer intended as a “qualified disclaimer” (see below).  Where a disclaimer is intended as a qualified disclaimer within the meaning of Section 2518 of the Internal Revenue Code, the disclaimer must specifically so state and must be delivered no later than nine months after the later of (i) the date the transfer is made or (ii) the disclaimant’s  21st birthday.

D.  Disclaimer by a surviving joint tenant or tenant by the entirety.  A surviving joint tenant or tenant by the entirety may disclaim any interest devolving to him by right of survivorship provided that (i) the tenancy is created by the act of the deceased joint tenant or tenant by the entirety, as the case may be, and (ii) the survivor did not join in creating the tenancy.  

      Effect of disclaimer.

Where property or a present interest has devolved under a testamentary instrument or by intestacy and the deceased owner (or, if a power of appointment is involved, the deceased donee  of the power) has not provided for another disposition, the property or interest will pass as if the disclaimant had predeceased the decedent or the donee, as the case may be.  Where the disclaimed interest is a future interest, the disclaimer will take effect as if the disclaimant had died before the occurrence of the event determining that the taker of the interest had become finally ascertained and his interest had indefeasibly vested.  Property or a present interest devolved to a disclaimant under a nontestamentary instrument or contract, where the instrument or contract  does not not provide for another disposition, devolves as if the disclaimant had died before the effective date of the instrument or contract.  If the interest is a future interest, the effect of the disclaimer will be the same as in the case of a testamentary instrument or intestacy.

Waiver and bar to the right to disclaim.  There are a number of provisions barring the right to disclaim, notably the would-be disclaimant’s acceptance of the property or interest or benefit thereunder.

     2.  Federal tax disclaimer requirements.

A.  Introduction.  These are contained in Section 2518 of the Internal Revenue Code.  In summary, the purpose of Section 2518, applicable only to those disclaimers which comply with its requirements (“qualified disclaimers”), is to treat the disclaimed interest as if it had never been transferred to the disclaimant (Section 2518(a)) but has passed directly from the transferor to the person entitled to receive the property as a result of the disclaimer.  Were it not for Section 2518, a beneficiary’s disclaimer would be treated for transfer-tax purposes as having been received by the disclaimant and then made the subject of  a potentially taxable transfer by him. 

Take a simple illustration:

Example 1.  In his will T leaves property to his 30-year old son, S, if S survives his father, or to T’s alma mater, if S does not.  T goes to his reward, survived by S.  S then makes a qualified disclaimer of the gift, which passes to T’s alma mater, thereby entitling T’s estate to an estate-tax charitable contribution deduction.  S is, as it were, “out of the loop.”  The fact that S may benefit from the resulting reduction in T’s estate-tax bill (if such is the case), will not preclude S’s disclaimer from “qualified” status.

B.  “Qualified disclaimer” defined.  Subsection (b) of Section 2518 has several elements:

(i)   the disclaimer must be in writing;

(ii)   it must be received by the transferor of the interest, his legal representative (T’s executor in the above example) or the holder of legal title to the property in question not later than nine months after the later of        

             (a)  the date on which the transfer creating the interest in the disclaimant is made* or

             (b)  the disclaimant’s 21st birthday;

           _____
             *   T’s death in the above example, not the date on which T signed his will or the date on which it was probated.
                
           
(iii)   the disclaimant has not accepted the interest or any of its benefits;*

and

(iv)  as a result of the disclaimer, the disclaimed interest passes, without any direction by the disclaimant,** either to

             (a)  the spouse of the decedent, or

             (b)  a person other than the disclaimant.

_____

*   Such as, for example, dividends, interest or rent from the disclaimed property, or payment as consideration for making the disclaimer.

**   Mere precatory (i.e., nonbinding) language does not constitute a “direction” - such as “It is my hope that she [the person receiving the disclaimed interest] will consider those charities of which I have long been a supporter.

C.  Some examples of Section 2518.  The regulations under Section 2518 are replete with examples of the application of the statute and make instructive reading.  Here in conclusion are a few examples based upon those propounded by the I.R.S.:

Example 2.  In her will T makes a bequest to each of her three children, A, B and C , who survives her.  The share of a child who does not survive T is to go that child’s descendants who do so survive, per stirpes. One of T’s children, A, a 35-year old, has several children and decides  that rather than take the legacy himself he would prefer to have it go to his children.  He makes a timely disclaimer to T’s executor and his children gratefully receive his bequest even though their father suggests that perhaps they should use their grandmother’s gift for something “worthwhile” like graduate school.  If the disclaimer meets the other statutory requirements, A has not made a gift to his children.  It should be noted, however, that while the fact that the gift is treated as having gone directly from T to her grandchildren means that A is not treated as having made a gift, this may inadvertently subject T’s estate to a generation-skipping transfer tax (discussed in later articles) since A’s children are two generation below A.  Out of the frying pan....!

Example 3.  Take the same facts as in Example 2 except that (i) A has no descendants living at his mother’s death (ii) a bequest to any child of hers who does not survive her and  leaves no descendants who do so survive passes into the residue of  her estate which (iii) is bequeathed to T’s descendants per stirpes.  Unless A’s disclaimer includes his residuary interest (i.e., caused by his disclaimer of his mother’s bequest), it will only be effective as to the shares of the residue which he has caused by his disclaimer. In other words, assuming that A’s two siblings or descendants of theirs survive T, despite his discaimer, A will inherit one third of his mother’s bequest to him.  If he wishes to have that also pass to other members of his family, he will need to have his disclaimer include his residuary  interest.

Example 4.   H and W, husband and wife, own their home jointly as tenants by the  entirety. They are legally married but have long been estranged from one another.  The house was paid for by H, with no contribution or participation by W. It is a second marriage for both and they have a prenuptial agreement in which each party waives all elective rights in the other’s estate.  H dies and in his will leaves W one fifth of his probate estate, if she survives him, and the other four fifths to the two children of their marriage (both prior marriages having been childless).  W, who plans to remarry, accepts her one-fifth bequest but makes timely disclaimer of her tenancy by the entirety (permissible because although she has lived in the house for 20 difficult years, she made no contribution towards its acquisition); accordingly, the children inherit the house.

Example 5.  X set up a trust for his 10-year old son, A, which is to run until A’s 30th birthday or his earlier death, at which time is to receive the trust or, if he dies before age 30, it is to go to A’s then living descendants or, if there are none, to certain designated charities.  Before he turns 21 A receives frequent distributions of income and of principal.  A turns 21 on December 21, 2006 and for ideological reasons disclaims his interest in the income from the trust on February 15, 2007, having received no further distributions of income or principal after his 21st birthday.  If all other requirements of Section 2518 are satisfied, this is a valid disclaimer of A’s income interest (but not of the principal, which must be included in the disclaimer if A is to completely dis-associate himself from his father’s munificence).  Distributions to A before the age of 21 do not constitute his acceptance of benefits.

             Back to Christopher Stoneman Index

Home  l  Your Account  l About Us  l  Our People  l  Investing  
   Services  l  Our Fees  l  FAQ  l  Links  l  Trust Topics  l  Contact Us