Postmortem disclaimer strategies.

There are numerous procedures and devices that may be implemented to achieve estate planning objectives after a decedent dies. Disclaimers are just one of many techniques that may be used in the postmortem planning context and should be considered as part of the bigger plan.

Disclaimers generally

Pursuant to Sec. 2518, a disclaimer is a written refusal to accept an interest in property. It must be signed and identify the property interest being disclaimed. A disclaimer must be made within nine months of the creation of the interest or the disclaimant's reaching age 21. In addition, it is required that the person making the disclaimer has not received the interest or any of its benefits, and that the interest pass without any direction on behalf of the disclaimant. Disclaimers may be used in the postmortem estate planning context for many purposes.

Disclaimer uses

Increase marital deduction: A disclaimer may be made to increase the marital deduction or to preserve the marital deduction that would otherwise be lost due to drafting errors. For example, consider an estate that is taxable because nonspousal bequests exceed the unified credit amount. By disclaiming the portion in excess of the unified credit amount, the estate may be transformed into a nontaxable estate when the disclaimed assets end up passing to the decedent's spouse. In addition, when nonspouse beneficiaries receive an interest in trust causing the trust to fail to qualify for a qualified terminable interest property (QTIP) election, such beneficiaries may disclaim their interests in such trust in order to qualify the trust for the QTIP election.

Decrease marital deduction: In certain situations, it may be appropriate for a surviving spouse to disclaim bequeathed property in order to reduce the amount of property that qualifies for the marital deduction. For instance, such a disclaimer may provide an opportunity for a decedent's spouse to use an otherwise unused unified credit or generation-skipping tax (GST) exemption. In fact, this strategy is often incorporated by design into certain estate plans in the form of "disclaimer trusts."

Executor commissions: Under certain circumstances in which the surviving spouse is designated as the estate's personal representative, it may be advantageous to reject the associated fees. This may be the case in a nontaxable estate whose sole heir is a surviving spouse. Note that commissions constitute taxable income; bequests, however, do not. If the entire estate passes to a surviving spouse subject to the marital deduction and the spouse is the estate representative, he may elect to disclaim the fee in order to effectively increase his spousal bequest.

On the other hand, it may be less desirable to disclaim executor fees when dealing with a high net worth taxable estate. The top estate tax bracket may be as high as 60%, while the highest income tax bracket is 39.6%.

GST exemption: If a decedent's child disclaims property that would then pass to grandchildren, the GST exemption can be allocated to the resulting skip transfer. Likewise, when grandchildren receive property in excess of the exemption amount, it is possible to disclaim the excess amount in order to avoid a GST liability.

QTIP and reverse QTIP election opportunity for GSTT purposes: A surviving spouse can disclaim a general power of appointment over trust property in order to qualify the property for QTIP treatment under Sec. 2056(b)(7) and allow for the opportunity to make a reverse QTIP election pursuant to Sec. 2652(a)(3), in order to fully use the decedent's generation-skipping transfer tax (GSTT) exemption when appropriate.

Special use valuation opportunities: Disclaimers may be used to ensure that qualified property (real property used as a farm or as part of another trade or business) can pass only to qualified heirs (i.e., a member of the decedent's family) in accordance with Sec. 2032A.

Surviving spouse's general power of appointment: When a decedent has left a general power of appointment trust for a surviving spouse, it may be possible for the surviving spouse to disclaim the general power of appointment and thus have the trust qualify for the marital deduction as a QTIP. To do this, it is necessary that, in accordance with the qualifying QTIP elements, the surviving spouse have no power to appoint the property to anyone other than himself during his lifetime. Making this disclaimer may effectively avoid attachment of the marital property by the surviving spouse's creditors by reason of the surviving spouse holding a lifetime general power.

Jointly held property: It is usually difficult for a surviving spouse to effectively disclaim his interest in property held jointly with a decedent spouse. The IRS has stated that the nine-month period for disclaiming an interest in jointly held property runs from the date that "title is created." Depending on the type of joint tenancy employed (joint tenancy with right of survivorship or tenancy by entirety) and local law, the nine-month period may run either from the decedent's date of death or the actual date that the tenancy was designated. In addition, surviving spouses are often precluded from disclaiming certain jointly held property because of the exercise of dominion and control over the property.

S corporations: A disclaimer by an income beneficiary's children of their interest as permissible beneficiaries of the trustees' discretionary power to distribute corpus during the life of the income beneficiary may be necessary to turn a trust into a qualified subchapter S trust.

Conclusion

Depending on the circumstances of a particular estate, disclaimers may or may not be appropriate. In any event, when disclaimers are employed, it is always important to assess both the tax and dispositive consequences in light of the many other postmortem planning options.