ALI-ABA Course of Study Estate Planning in Depth ... - ALI CLE

789
ALI-ABA Course of Study
Estate Planning in Depth
Cosponsored by Continuing Legal Education for Wisconsin (CLEW)
of the University of Wisconsin Law School
June 14 - 19, 2009
Madison, Wisconsin
Thank You But No Thank You:
Advanced Issues in Disclaimer Planning
By
Nancy G. Henderson
Henderson, Caverly, Pum & Charney LLP
Rancho Santa Fe, California

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Thank You But No Thank You:
Advanced Issues in Disclaimer Planning
Nancy G. Henderson, Esq.*
Henderson, Caverly, Pum & Charney LLP
Rancho Santa Fe, California
nhenderson@hcesq.com
I. Introduction 1
II. Tax Consequences of Disclaimers 1
A. Tax Consequences of Non-Qualified Disclaimers 1
B. Tax Consequences of Qualified Disclaimers 3
III. Disclaimers Under State Law 6
A. The Importance of State Law in Disclaimer Planning 6
B. Uniform Disclaimer of Property Interests Act 7
IV. Disclaimers of Partial Interests in Property 7
A. The Property Must be Severable 8
B. Concept of an “Undivided Portion” 8
C. The “Separate Interest” Rule 9
D. Separate Interests in Income and Principal 10
E. Disclaimers of Pecuniary Amounts 11
F. Powers of Appointment as Separable from Property Subject
to the Power 13
G. Certain Distribution Rights May be Separately Disclaimed 15
H. Specific Assets 16
V. Requirements for a Qualified Disclaimer 16
A. Requirement that the Disclaimer Must Be Irrevocable
and Unqualified 17
B. Requirement that Disclaimer Must Be in Writing 20
C. Requirement that Disclaimer Be Delivered Within
Nine Months 24
D. Requirement that There Be No Acceptance of Benefits Prior
to the Disclaimer 31
E. Requirement that Disclaimed Property Must Pass Without
Direction by the Disclaimant 40
F. Requirement that Disclaimed Property Must Pass Either to a
Person Other than Disclaimant or to Transferor’s Spouse 48
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VI. Disclaimers by Trustees 49
VII. “Transfer” Disclaimers 50
VIII. Using Disclaimers in Estate Planning 51
A. Applicable Exclusion Trust Funding 51
B. Marital Deduction Trust Funding 52
C. Funding a QDOT 52
D. Planning for Tangible Property 52
E. Funding Charitable Bequests 52
F. Funding Charitable Split Interest Trusts 53
G. Retirement Plans 53
H. Fixing Defective Plans 53
I. Opportunities with Successive Deaths 54
IX. Conclusion 54
Appendix:
Selected Disclaimer Provisions from a California Joint Revocable Trust
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Thank You But No Thank You:
Advanced Issues in Disclaimer Planning
Nancy G. Henderson, Esq.*
Henderson, Caverly, Pum & Charney LLP
Rancho Santa Fe, California
nhenderson@hcesq.com
I. Introduction
Donees and beneficiaries are not required to accept the benefits of a gift, inheritance, trust
distribution or power of appointment; all such benefits can be renounced. Where such a
renunciation satisfies the requirements of a “qualified disclaimer” under §2518 of the Internal
Revenue Code (“Code”) and applicable Treasury Regulations (“Regulations”), the disclaimer
will not result in the imposition of a gift tax upon the disclaimant and may avoid other adverse
tax and non-tax consequences as well. Consequently, qualified disclaimers provide both
flexibility in estate planning and serve as a valuable tool in post-mortem estate and trust
administration.
Importantly, the treatment of a disclaimer as “qualified” or “non-qualified” is principally
a tax concept. A disclaimer that fails to meet the requirements of a “qualified disclaimer” for
federal gift tax purposes (referred to in this Outline as a “non-qualified disclaimer”) can, and in
most cases will, nevertheless result in an effective transfer of the disclaimed property, interest or
power for state law purposes. This Outline examines the most significant tax consequences of
both qualified and non-qualified disclaimers, the requirements of a qualified disclaimer and some
of the many uses of disclaimers in estate planning and post-mortem estate and trust
administration.
II.
Tax Consequences of Disclaimers
A. Tax Consequences of Non-Qualified Disclaimers. If a disclaimer is a nonqualified
disclaimer, the disclaimant is treated as having received the disclaimed property,
interest or power from the original transferor and then having transferred that property right or
interest, or released such power, to the person who takes it as a result of the disclaimer. 1 If the
transfer is gratuitous, then there may be estate, gift or GST tax consequences arising from the
disclaimer. If the disclaimer is for consideration, income and capital gains tax consequences
must be considered.
While non-qualified disclaimers do not enjoy the tax advantages of qualified
disclaimers, they are nevertheless important and useful tools to shift assets and property interests
in appropriate circumstances. For example, the income beneficiary of a trust could live well
beyond the expected term of the trust (and perhaps beyond its usefulness to that beneficiary),
1 See Treas. Reg. §25.2518-1(b).
* © Nancy G. Henderson 2009. Ms. Henderson wishes to recognize her friend and mentor, Lynn Hart Muto, now retired, who
authorized the use of her 1994 Heckerling Institute paper, Advanced Issues in Disclaimer Planning: Sharpening an Old Tool, as
the foundation for this Outline. Ms. Henderson also wishes to thank her associate, Rebecca Lawson for her editorial contribution.