Disclaimers in 2010

Disclaimers in 2010

By by Martin M. Shenkman, CPA, MBA, JD

Disclaimers of 2010 Bequests

Disclaimers, or renunciations, are a powerful post-death (post-mortem) estate planning technique. It is sometimes possible for the recipient of a particular gift or bequest to refuse to accept (disclaim) that gift or bequest. The property then passes to whoever would have received it if the disclaiming person had not survived the decedent. This will require complying with any state law mandate for a disclaimer to be valid. These might include a filing with the court, notice to the executor, or some other action. Some states require that this be done within nine months of the decedent's death. For a disclaimer to be valid under federal estate tax rules, it must comply with the requirements of Code Section 2518. These include:

  • The disclaimer must be in writing.
  • The disclaimer must be made on a timely basis that is generally nine months from the date of transfer for a gift or the date of death for a bequest. This is the one provision for which TRA has provided some leniency.
  • The person disclaiming cannot have accepted benefit from the property.
  • The property must pass without the direction of the person making the disclaimer (although a special rule is provided for a spouse).

Hopefully, the executors whose estates might benefit from these extensions heeded the general advice advisers provided to withhold distributions pending clarification of the law. If assets were distributed to beneficiaries, or the beneficiaries benefited from the property involved, it may no longer be feasible to file a disclaimer (renunciation) with respect to those assets. The more time that passes the more difficult it will be to prevent beneficiaries from benefiting from the assets and thus undermining the right to disclaim.

Will the extension of the time to make disclaimers still have hurdles to face under the language of governing documents or state law? Will states have to create disclaimer extension patches similar to the formula clause patches to enable executors to take advantage of this leniency? What will the legal impact be to the disclaimer of real estate in a state that has a nine month statutory deadline? If the statutory deadline is passed, the disclaimer would still be valid under federal estate tax law, so long as it is within the extension period provided by the TRA. But, if the disclaimer does not comport with state law, will the disclaimer be invalid to affect the transfer of real estate as desired? How will title insurance companies address this? Code Section 2518(c)(3) may help. It says that a transfer that does not qualify as a disclaimer under local law, may still constitute a qualified disclaimer for federal tax purposes if the disclaimer operates to transfer property to the persons who would have received the property, had it been a qualified disclaimer under local law.

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