IRS publishes proposed regulations on disclaimers.

The IRS recently issued proposed regulations (REG-208215-91), relating to the treatment of disclaimers for estate and gift tax purposes, that clarify existing provisions governing the disclaimer of certain property interests and powers. These proposed regulations would be effective for transfers creating the interest or power to be disclaimed made after the date of publication of final regulations in the Federal Register. In addition, the proposed regulations armed the rules affecting persons who disclaim powers or interests in jointly owned property. Likewise, the proposed rules dealing with joint tenancy and joint bank accounts are proposed to be effective for disclaimers made after final regulations are published in the Federal Register.

Interests and Powers Subject to

the Disclaimer Rules

Under Sec. 2518(a), if a person makes a qualified disclaimer, for transfer tax purposes the interest disclaimed is treated as never having passed to the disclaimant. In order to meet the definition of a qualified disclaimer under Sec. 2518(b)(2)(A), an interest must be disclaimed within nine months of the date of "the transfer creating the interest" in the disclaimant. A person to whom any interest passes by reason of the exercise or lapse of a general power of appointment also must disclaim the interest passing within nine months after the exercise or lapse.

Current Regs. Sec. 25.2518-1(a)(1) provides that Sec. 2518 applies to the disclaimer of interests or powers created pursuant to "taxable transfers" made after Dec. 31, 1976. Regs. Sec. 25.2518-2(c)(3) further provides that the nine-month period within which the disclaimer must be made is to be determined with reference to the "taxable transfer" creating the interest in the disclaimant.

Prop. Regs. Sec. 25.2518-2(c)(3)(i) clarifies that the application of Sec. 2518, or the commencement of the nine-month period, does not depend on the actual imposition of a transfer tax when the interest to be disclaimed is created. For instance, if the disclaimer involved an interest in foreign-situs property transferred by gift, devise or bequest by a nonresident alien donor or decedent, it would have to comply with the requirements of Sec. 2518, to be a qualified disclaimer - notwithstanding the lack of a "taxable transfer" creating the property interest. In addition, in the case of a disclaimer of an interest passing pursuant to the exercise, lapse or release of a general power of appointment, the disclaimer must be made within nine months of the exercise, lapse or release of the power, regardless of whether the exercise, lapse or release is subject to estate or gift tax (i.e., under Secs. 2041(a)(1) and 2514(a), the lapse or release of pre-1942 general powers of appointment are not subject to estate or gift tax).

Disclaimers of Jointly Owned

Property

Under Regs. Sec. 25.2518-2(c)(4), to be a qualified disclaimer, a surviving joint tenant's disclaimer of both an interest passing to the joint tenant on the creation of the tenancy, and the survivorship interest in the joint tenancy or tenancy by the entirety, must be made within nine months after the transfer creating the tenancy. Further, a joint tenant cannot make a qualified disclaimer of any portion of a joint interest attributable to consideration furnished by that tenant.

After several court decisions invalidated those current regulations with respect to joint interests that are unilaterally severable (see, e.g., Kennedy, 804 F2d 1332 (7th Cir. 1986); Dancy, 872 F2d 84 (4th Cir. 1989); McDonald, 853 F2d 1494 (8th Cir. 1988), the Service announced that it will follow these decisions.

Prop. Regs. Sec. 25.2518-2(c)(4) would conform existing regulations to these court decisions, by allowing a surviving joint tenant to make a qualified disclaimer of his interest in the property within nine months of the death of the first tenant to die, provided that the joint tenancy may be unilaterally severed by either party. The fact that the surviving joint tenant provided some or all of the consideration creating the joint tenancy would not negate the ability to make a qualified disclaimer of such interest.

Note that whether a joint tenancy is subject to unilateral severance by either joint tenant is a matter of local law (tenancies by the entirety are generally not severable without the consent of both parties). However, a post-mortem planning opportunity may exist in cases involving unilaterally severable joint tenancies, by which the decedents unified credit could be utilized to a greater advantage.

Married couples often "overutilize" joint tenancy property, thereby wasting all or a portion of the unified credit in the estate of the first spouse to die (i.e., on the death of the first joint tenant, joint tenancy property passes by operation of law to the surviving spouse subject to the unlimited Federal estate tax marital deduction). In such cases, a qualified disclaimer by the surviving joint tenant could be made following the death of the first joint tenant to die. The property or property interest subject to the disclaimer would pass, subject to state law, as if the surviving spouse had predeceased the decedent (e.g., to the decedent's children or to a credit shelter trust).

Prop. Regs. Sec. 25.2518-2(c)(4) would also extend the nine-month-after-death disclaimer rule to the following tenancies in real property between spouses: (a) those created before 1982 in which no election was made under old Sec. 2515 (i.e., to treat the transfer creating the co-tenancy as a gift) and (b) those created on or after July 14, 1988, if the nondonor spouse is not a U.S. citizen.

Disclaimers of Joint Bank

Accounts

The creation of a joint bank account is treated as an incomplete transfer for gift tax purposes, since the contributing joint tenant may generally withdraw contributed funds without the consent of the other joint tenant. Thus, the transfer to a joint bank account becomes complete, for transfer tax purposes, at the earlier of the death of the joint tenant creating the co-tenancy or such time as the noncontributing joint tenant has withdrawn the funds.

Prop. Regs. Sec. 25.2518-2(c)(4)(iv) provides that the nine-month period for making the qualified disclaimer of an interest in a joint bank account starts on the death of the first joint tenant, since the transfer creating that interest occurs at the first tenants death. The proposed regulations also clarify that a surviving joint tenant cannot disclaim any portion of the account attributable to that survivor's contribution to the account.

Finally, for estate tax purposes, the disclaimed interest in a joint bank account would be includible in the decedent's estate under Sec. 2033 rather than Sec. 2040(a) or (b), since under slate law, the disclaimed property would become part of the decedent's probate estate. The balance of the joint bank account, however, would be includible in the decedents gross estate under Sec. 2040(a) and (b).

Note that the proposed regulations also apply to joint brokerage accounts, due to the generally parallel treatment of these accounts for transfer tax purposes (see Rev. Rul. 69-148).