Disclaimers — Federal Estate, Gift and Generation-Skipping Tax Considerations (Portfolio 848)

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Tax Management Portfolio, Disclaimers — Federal Estate, Gift and Generation-Skipping Tax Considerations, No. 848-3rd, presents a detailed study of disclaimers under the federal estate, gift and generation-skipping transfer tax laws.

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Tax Management Portfolio, Disclaimers — Federal Estate, Gift and Generation-Skipping Tax Considerations, No. 848-3rd, presents a detailed study of disclaimers under the federal estate, gift and generation-skipping transfer tax laws. This portfolio describes the tax uses of disclaimers, including the correction of otherwise costly errors made in the drafting of wills and trusts. In addition to examining the law applicable to transfers made after 1976, as codified in §2518, the portfolio discusses the law applicable to pre-1977 transfers.
A disclaimer is the refusal to accept a gratuitous transfer. If the rules are complied with, a disclaimant has not made a transfer for federal gift, estate or generation-skipping transfer tax purposes. To make a qualified disclaimer, the disclaimant must make an irrevocable and unqualified refusal of the interest in writing, delivered to the transferor within nine months of the date of the transfer creating the interest (or within nine months of reaching age 21). In addition, the disclaimant cannot have accepted the interest or any of its benefits and, as a result of the disclaimer, the interest passes without any direction on the part of the disclaimant to either the decedent's spouse or a person other than the disclaimant. Proper planning and use permits a disclaimer to serve as a valuable post mortem planning tool.
This portfolio discusses the federal tax rules and applicable state law, indicates the areas of uncertainty, and warns of traps for the unwary in the tax and nontax law of disclaimer.
This portfolio may be cited as Cline, 848-3rd T.M., Disclaimers — Federal Estate, Gift and Generation-Skipping Tax Considerations.


Christopher P. Cline, Esq.

Christopher P. Cline, B.A., San Francisco State University; J.D., Hastings College of the Law; fellow, American College of Trust and Estate Counsel; adjunct professor of law, Northwestern College of Law, Lewis & Clark College (1997); member and officer, Executive Committee of Estate Planning and Administration Section, Oregon State Bar; member, Board of Directors, Estate Planning Council of Portland, Inc.; member, Tax Management's Estates, Gifts and Trusts Advisory Board; contributor to Tax Management Estates, Gifts & Trusts Journal and numerous other professional publications; author of 825 T.M., Powers of Appointment — Estate, Gift, and Income Tax Considerations; T.M., Dynasty Trusts; T.M., Disclaimers — State Law Considerations; and T.M., Trustee Investments.

Table of Contents

Detailed Analysis

I. General

A. Introduction

B. Relation-Back Concept

C. The Governing Law

D. Overview of Federal Transfer Taxes

1. Gift and Estate Taxes

2. Generation-Skipping Transfer Tax

E. Overview of Qualified Disclaimer

II. Disclaimer with Respect to Pre-1977 Transfers

A. Early Disclaimer Law

B. Law of Disclaimers of Pre-1977 Transfers

C. Case Law: Determining a “Reasonable Time”

1. The Keinath Case

2. The Jewett Case

3. Irvine and Ordway

D. The Time Period: What Is a Reasonable Time?

III. The Qualified Disclaimer - 2518: Disclaimer with Respect to Post-1976 Transfers

A. Generally

B. Requirements for a Disclaimer: The Five Tests

1. Writing Test

2. Nine-Month Test

a. Receipt, Recipient, and Delivery

b. The Period: Nine Months

c. Transfer Creating the Interest

(1) Lifetime Transfers

(2) Revocable Transfers

(3) Powers of Appointment - General and Limited

(4) One Transfer, Two Taxable Events

(5) Qualified Terminable Interest Property and Qualified Domestic Trust

(6) Successive Disclaimers

(7) Joint Property

(a) Property Other Than Bank and Investment Accounts

(b) Bank, Brokerage, and Investment Accounts

(8) Community Property

(9) The Period: The Age 21 Stretch Out

(10) Possible Limitation on the Age 21 Stretch Out for Marital and Charitable Deduction Purposes

3. No Benefits (or No Acceptance) Test

a. Findings of No Acceptance

b. Findings of Acceptance

c. Acceptance of Powers of Appointment

4. The Passage Test

a. No Direction; No Interest

b. Surviving Spouse as Disclaimant

5. State Law Validity Test

C. Disclaimers of Less than an Entire Interest: “Undivided Portion,” “Separate Interest,” and “Severable Property”

1. Disclaiming Some Trust Interest But Not Others

2. Severable Property

3. Partial Interests

D. Fiduciary as Disclaimant

1. Disclaimant as Fiduciary of Disclaimed Interest

2. Fiduciary as Beneficiary of Disclaimer

3. Authority of Fiduciary to Disclaim

4. Disclaiming of Fiduciary Power

E. Failure to Assert Right as Disclaimer?

IV. Uses of Disclaimer

A. Generally - Changing the Dispositive Plan

1. Altruism

2. To Rewrite Will or Rearrange Disposition of Nonprobate Assets

3. Control of Family Business

B. Fixing the Marital Deduction

1. Eligibility for Marital Deduction of Spouse's Interest in Charitable Remainder Trust

2. Ineligibility for the Marital Deduction of Gift to Noncitizen Spouse

C. Credit Shelter Drafting and Repairs

1. Credit Shelter Drafting with Disclaimers

a. Fractional Formula with “Pick and Choose” Funding

b. Disclaimer Shelter Trust

c. Partial QTIP Election

d. Clayton QTIP Trust

e. Comparing Funding Methods

2. Credit Shelter Repairs

D. Formula Disclaimers

E. Intentionally Creating an Estate Tax (or Using Unified Credit)

F. Using the Previously Taxed Property Credit

1. Planning with the Previously Taxed Property Credit

2. Using Disclaimers to Create a Previously Taxed Property Credit

G. Disclaimers with Retirement Plans and IRAs

H. Disclaiming to Apply Alternate Valuation

I. Disclaimers to Private Foundations

J. To Increase or Save the Charitable Deduction

K. For Special Use Valuation Purposes

L. For Generation-Skipping Transfer Tax Planning

1. Grandfathered Transfers

2. The GST Exemption

3. Other Uses

M. Income Tax Purposes

1. Generally

2. Tax-Favored Corporate Redemptions

3. S Corporations

4. Basis

N. Drafting in Anticipation of Disclaimer

V. Errors in Drafting and Use of Disclaimers, or in Failing to Use Disclaimers

Introductory Material

A. The Untimely Disclaimer and Short-Sighted Acceptance

B. The Boomerang and Wrong-Way Disclaimers

C. The Wrong Disclaimant

D. The Disclaimer That Never Was

VI. Conclusion

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Legislative History of 1976 Enactment of 2518 Tax Reform Act of 1976 (P.L. 94-455)

Worksheet 2 Legislative History of 1978 Amendment of 2518 Revenue Act of 1978 (P.L. 95-600)

Worksheet 3 Legislative History of 1981 Amendment of 2518 Economic Recovery Tax Act of 1981 (P.L. 97-34)

Worksheet 4 Standby or Fallback Disclaimer Trust

Worksheet 5 Authorization for Fiduciary Disclaimers

Worksheet 6 Tax Apportionment Clause

Worksheet 7 Disclaimer Flow Charts for Joint Property




Treasury Rulings: