ALI-ABA Course of Study Advanced Estate Planning Techniques March 24-25, 2011 San Francisco, California

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1 181 ALI-ABA Course of Study Advanced Estate Planning Techniques March 24-25, 2011 San Francisco, California Disclaimers By Paul N. Frimmer Irell & Manella LLP Los Angeles, California

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3 183 Disclaimers Paul N. Frimmer Loeb & Loeb LLP Los Angeles, California I. Federal Definition of "Qualified Disclaimer" After Tax Reform Act of 1976 and Revenue Act of IRC 2518 A. A "qualified disclaimer" is an irrevocable and unqualified refusal to accept an interest in property, if 1. The disclaimer is in writing, IRC 2518(b)(1); Reg (b)3 1 [a written disclaimer made by the disclaimant's attorney acting on oral instructions was valid. Allen v. Comm'r., 56 TCM 1494 (T.C. Memo ); disclaimer may be made by attorney under durable power of attorney. Private Letter Ruling ; beneficiary's death before signing disclaimer was not a qualified disclaimer. Delaune v. U.S.,143 F.3d 995 (5th Cir. 1998); Chamberlain v. Comm'r, T.C. Memo , aff'd in an unpublished opinion, 87 AFTR 2d ]; 2. 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). IRC 2518(b)(2); Reg (b)(2); (c), 3. There has been no acceptance of the interest or benefits, IRC 2518(b)(3) [residing in a community property residence/farm during the lifetime of both spouses did not preclude the surviving spouse from disclaiming the deceased spouse's interest in the residence/farm. Private Letter Ruling , citing Prop. Reg (d) (1)]. See also Private Letter Rulings ; ; ); Reg (d), and, 4. 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. IRC 2518(b)(4)(A) and (B); Reg (e). B. As long as the disclaimer becomes irrevocable prior to the expiration of the nine month period, it will be a qualified disclaimer. See Private Letter Rulings ; ; (N.Y. law). A rescission of a disclaimer based 1 All references to "Reg. " refer to the final regulations published on August 7, 1986; references to "Prop. Reg. " refer to the Proposed Regulations published on July 22, /1/11

4 184 on mistake of law was not permitted in Webb v. Webb, 301 S.E. 2d 570 (W. Va. 1983), and Holden v. Holden, 333 S.C. 456, 520 S.E.2d 322 (1999), aff d, S.C. (2000). But see, Breakiron v. Gudonis, USTC 60,597, (D.C. Mass. 2010). See also, E. Lange v. Comm'r, 96-2 USTC 60,244 (1996); Private Letter Ruling ; Estate of Paul Ciaffoni, 787 A. 2d 971 (Pa. Super. 2001). 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 (Sur. Ct., N.Y. Co. 2004). C. IRC 2518 does not apply to interests created prior to 12/31/76. Tax Reform Act of 1976, Section 2009(e)(2) ("TRA 1976"); Reg ; Private Letter Rulings ; ; ; ; ; ; Declaratory judgment re validity of proposed disclaimer is not available. Ingham v. Hubbell, 462 F. Supp. 59 (S.D. Ia. 1978). The 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; Private Letter Ruling A disclaimer conditioned on receipt of a favorable ruling will not be qualified. See Gen. Counsel Memo , 7/12/63, referred to in Gen. Counsel Memo , 8/10/ According to the Regulations, IRC 2518 will apply to "taxable transfers" occurring after 12/31/76. Reg (a); (c)(2) and (3); Private Letter Rulings ; ; ; ; ; ; ; 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 IRC See Reg (c)(2) and (3); Private Letter Ruling 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 IRC See Reg (c)(2) and (3); Private Letter Ruling 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); Private Letter Rulings ; ; ; (disclaimers of remainder of a GRIT allowed within nine months of grantor's death when grantor retained a general power if he died prior to the GRIT term and he died prior to GRIT term.) 5. A disclaimer of an interest created by a post-1976 exercise of a pre limited power of appointment was not governed by IRC Private Letter Ruling ! 1/1/11

5 For the consequences of a disclaimer of a pre-1972 general power of appointment, see Private Letter Ruling D. A qualified disclaimer "relates back" to the date of the transfer. See Private Letter Ruling 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 IRC 2056(b)(7). However, in Private Letter Ruling , 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 Bk and Tr. Co. v. U.S., 78-2 USTC 13,248 (D.C.W.Pa. 1978). E. If property is subject to tax as a result of a qualified disclaimer, it is eligible for the credit for tax on prior transfers (IRC 2013). II. Economic Recovery Tax Act of 1981 (ERTA) Changes in IRC 2518 A. IRC 2518(c)(3) is added, to treat as a qualified disclaimer: 1. A written transfer of the transferor's entire interest in property; 2. Which meets the requirements similar to the requirements of IRC 2518(b)(2) and (3); and 3. Which is to a person who would have received the property had the transferor made a qualified disclaimer (within the meaning of IRC 2518(b)). B. IRC 2518(c)(3) is effective for transfers creating an interest in the disclaimant after 12/31/81. C. Regulations for IRC 2518(c)(3) are expected "shortly." T.D. 8095, Supplementary Information to Final Regulations on Section The first judicial discussion of IRC 2518(c)(3) appears in Dancy Estate v. Commissioner, 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. III. Federal Gift Tax Aspects of Disclaimers A. If the disclaimer is a "qualified disclaimer" under IRC 2518, it is not a gift for federal tax purposes. Reg (b); Private Letter Ruling A non-qualifying disclaimer of an interest in a qtip trust was a net gift. Private Letter Rulings ; ! 1/1/11