Qualified disclaimers must be timely.

Disclaimers are an effective way to continue estate planning after death. A qualified disclaimer results in the application of the transfer tax system as if the property never passed to the disclaimant. In order to be a qualified disclaimer: (1) the disclaimer must be an irrevocable and unqualified refusal to accept an interest in property; (2) the disclaimer must be in writing and signed by the disclaimant or his agent; (3) the disclaimer must be delivered to the transferor or his agent by the later of nine months after the date on which the interest was created, or nine months after the date on which the disclaimant attains the age of 21; (4) the disclaimant must not have accepted the property interest or any of its benefits; and 151 as a result of the disclaimer, the property interest must pass, without any direction on the part of the disclaimant, either to the decedent's spouse or to a person other than the disclaimant; sce Sec. 2518(b). Note that a disclaimer must meet all of these requirements to be qualified.

A district court recently decided a case involving the effect of an estate tax return extension on the due date for making "qualified disclaimers" under Sec.2518.

In Fitzgerald, DC La., 1993, the decedent died intestate on Feb. 13, 1988. Although the decedent was survived by her spouse, under state law her entire estate passed to her three children. Two of the decedent's children were 21 or older on the date of the decedent's death, while the third was not.

The estate applied for an extension of time to file the estate tax return on Nov. 10, 1988. The extension was granted and the estate tax return was filed on May 13, 1989. The decedent's three children executed disclaimers of their respective interests in the estate (with the exception of cash totaling $600,000) on May 12, 1989, the day before the estatc tax return was filed. As a result, all but $600,000 of the decedent's gross estate passed to the decedent's spouse. Consequently, the decedent's estate claimed the marital deduction for the property passing to the decedent's spouse, and the estate tax return showed that the estate owed no estate tax.

Under Sec. 2518(b)(2)(A) and (B), the transferor of a disclaimed interest (or his agent) is required to receivc the disclaimer within nine months after the later of "the day on which the transfer creating the interest. . . is made, or the day on which [the disclaimant] attains age 21." Two of the decedent's three children were 21 years old or older on the date of the decedent's death. Therefore, they should have delivered their disclaimers to the decedent's personal representative no later than nine months after the decedent's death, or Nov. 13, 1988. However, they did not execute their disclaimers until May 12, 1989. As a result, their disclaimers did not constitute "qualified disclaimers" for Federal estate tax purposes.

The district court held that extending the time for filing an estate tax return does not extend the time in which a disclaimer must be executed because (1) Sec. 2518's language clearly defines what constitutes a "qualified disclaimer" and (2) Sec. 2518 contains a limitation period applicable to all "qualified disclaimers," except those of a transferee who was not 21 years old at the time his interest was created. If a disclaiming instrument does not constitute a "qualified disclaimer," the applicable interest is not treated as being disclaimed for Federal tax purposes. Therefore, the decedent's spouse was not treated as owning the property disclaimed by the decedent's two adult children for estatc tax purposes, and that property could not qualify for the marital deduction. Consequently, the estate was liable for the estate tax on the property.

The court noted that the decedent's other child had not attained the age of 21 on the date of the decedent's death. As a result, the court held that the decedent's minor child's disclaimer constituted a "qualified disclaimer" for Federal estate tax purposes. Consequently, the marital deduction was allowed for the disclaimed property because it was treated as passing directly to the spouse.

The Fitzgerald case highlights the importance of the timcliness of disclaimers of property interests transferred at death. In practice, evaluating the need for a disclaimer is often triggered by the transferor's death. However, many transfers occur a year or more before the transferor's death, i.c., inter vivos transfers. Such transfers must be disclaimed before the transferor's death. Therefore, it is recommended that the need for a disclaimer be evaluated in connection with all inter vivos transfers. See Regs. Sec. 25.2518-2(c)(5) for some examples of inter vivos transfers between spouses and to trusts.

Note: Sec. 2518 applies only in determining whether a disclaimer is a "qualified disclaimer" for Federal estate tax purposes. A disclaimer may be legally effective but, at the same time, may not constitute a "qualified dis claimer" for Federal estate taxpurposes.

From Leila K.M. Rossberg, Greg Hall, J.D., Portland, Ore., and John Gardner, J.D., Washington, D.C.