Fifth Circuit rules disclaimer is qualified.

In Estate of Monroe, 124 F3d 699 (1997), rev'g 104 TC 352 (1995), the Fifth Circuit ruled that a disclaimer is qualified (and therefore valid) for gift and estate tax purposes even if the disclaimant made the disclaimer in expectation of a future benefit. However, a disclaimer is not qualified if there is mutually bargained-for consideration that results in a promise or agreement that the disclaimant will receive a benefit for disclaiming.

Sec. 2518(a) specifies that, if a person makes a qualified disclaimer of an interest in property, the estate and gift tax laws apply as if the interest had not been transferred to such person. Sec. 2518(b) defines a qualified disclaimer as a written "irrevocable and unqualified refusal" to accept the interest. The disclaimant must "not have accepted the interest or any of its benefits." Regs. Sec. 25.2518-2(d)(1) adds that express or implied acceptance of the interest invalidates the disclaimer if made prior to disclaiming. Acceptance includes accepting dividends, interest or rent from the property or pledging it as security for a loan. Also, the acceptance of any consideration in return for disclaiming is acceptance of the benefits of the entire interest disclaimed.

In 1989, Louise Monroe (age 91) died, leaving a multimillion-dollar estate. Her husband, Edgar (age 92) was executor; Edgar's nephew, Robert, assisted in administering the estate. The Monroes had no children. Louise's will made 31 specific bequests to family members, long-time employees and friends; she also made three $500,000 bequests to two grandnieces and a grandnephew. Edgar was the residual beneficiary of Louise's estate.

The estate's accountants determined that the individual bequests would be substantially reduced by the applicable Federal estate tax. However, if the legatees disclaimed their bequests, the amounts disclaimed would pass to Edgar, and no estate tax would be assessed (due to the Sec. 2056(a) unlimited martial deduction). The accountants assured Edgar that he could independently make gifts and bequests to these legatees even if they disclaimer Louise's bequests. However, the accountants also pointed out that the legatees must not be promised anything in return for disclaiming.

Edgar asked five and Robert asked 24 of the legatees for disclaimers. After rehearsing with the accountants, Robert made the following points to the legatees: Edgar was upset about the taxes the legatees would have to pay; he would like them to disclaim; any disclaimer would be voluntary and without consideration. In December 1989, all 29 legatees signed disclaimers totalling $892,781. Within a month, Edgar wrote each disclaimant a check that approximately equaled the gross amount disclaimed. He wrote "gift" on each check. Gift tax returns were filed.

The IRS disallowed all of the disclaimers, claiming that the legatees accepted consideration for the disclaimers when they received the checks from Edgar. The estate maintained that the disclaimers and Edgar's checks were unrelated, as there was no promise or agreement between Edgar or Robert and any legatee to exchange a disclaimer for consideration. The Tax Court sustained the Service's position on 28 of the 29 disclaimers, ruling that the consideration for the disclaimers was "the implied promise that [the disclaimants] would be better off if they did what Monroe wanted them to do than if they refused."

The Tax Court cited the testimony of three legatees and of Robert Monroe. Edgar's butler and chauffeur for 40 years testified that Edgar told him "he would take care of it," meaning that Edgar would take care of the butler if he disclaimed. Edgar's niece testified that "you don't go against Edgar if you ever want anything from him." Edgar's grandniece, who disclaimed $500,000, testified that although she was not promised anything from Edgar or Robert, she assumed she would receive the $500,000 from Edgar, either by gift or in his win. The Tax Court ruled that this testimony was representative of most of the legatees. Robert testified that, while he had not bargained with or made any promises to the disclaimants, he had mentioned Edgar's generosity to them, which the court interpreted as informing the claimants that they probably would receive something from Edgar in the future if they disclaimed. The Tax Court concluded that, even if Monroe had no legal obligation to compensate the disclaimants, they anticipated (and shortly thereafter received) payment from him that left them in the same economic position as if they had accepted Louise's bequests. Therefore, the acceptance of the consideration disqualified the disclaimers. The estate appealed.

The Court of Appeals ruled that the key issue in Estate of Monroe was whether the disclaimers satisfied the "unqualified refusal to accept an interest in property" requirement. The court pointed out that a qualification would mean that the renunciation was not complete because property or its benefits had been retained or received for the disclaimer. The only possible benefit received in this case was consideration, which is an exchange of promises: a promise "must have been offered by one party, and accepted by the other."

The Court of Appeals ruled that a disclaimant's "mere unenforceable hope of future benefit," whether based on family, friendship or employment, did not rise to the level of consideration. In fact, the purpose of the statute authorizing disclaimers was to reduce transfer taxes and increase family wealth, which was expected to be passed on to the disclaimants in the future. Therefore, the court ruled that the correct standard for a qualified disclaimer required a finding of whether there was "actual bargained-for consideration" for each disclaimer. The promise of a benefit in return for the finding could be explicit or implied, but there had to be a mutual agreement. What the person promising said, what the disclaimant understood and the motive for disclaiming were relevant in making this finding.

Applying this standard, the Fifth Circuit ruled that 22 of the 26 disclaimers were qualified. These 22 disclaimants had no legal right to Edgar's gifts. Robert's rehearsed presentation and his mention of Edgar's generosity did not amount to a promise of a future benefit. Instead, it only informed the disclaimants that the probability was good they would receive something from Edgar in the future. The remaining six disclaimers were remanded to the Tax Court to determine if Robert or Edgar indicated to these disclaimants that they would receive the full amount of the disclaimed bequests.

Estate of Monroe provides support for disclaimers even if they are followed shortly thereafter by gifts of the disclaimed amounts, as long as no explicit or implicit promise is made that the disclaimants will receive something for disclaiming. However, this opinion is binding only in Louisiana, Texas and Mississippi. Also, better strategies were available to the Monroes. Louise and Edgar could have made lifetime gifts using the annual $10,000 per donee exclusion, and Edgar could have either waited longer to make the gifts or instead made bequests in his will.