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By Eric M. Kramer, Esq., CPA,
Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.

Proposed regulations have recently been issued that have answered some questions while leaving others unanswered in the area of qualified disclaimers. Although disclaimers have many uses in post-mortem estate planning, one of the more important uses is to take advantage of the $600,000 exemption in the estate of the first spouse to die that might otherwise be lost.

The use of disclaimers is by reference to IRC section 2518 from Section 2046 (estate tax disclaimer statute). In order to be effective, IRC Section 2518(b) provides that a disclaimer must be irrevocable and unqualified, but only if--

1. such refusal is in writing

2. such writing is received by the transferor of the interest, his legal representative, or the holder of the legal title to the property to which the interest relates not later than the date which is nine months after the later of--a) the date on which the transfer creating the interest in such person is made, or b) the day on which such person attains age 21,

3. such person has not accepted the interest or any of its benefits, and

4. as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either a) to the spouse of the decedent, or b) to a person other than the person making the disclaimer.

Example: On January 1, 1996, "A" dies and is survived by his spouse, "B." A and B have $1.2 million of property held in joint name. By operation of law, the jointly held property passes from A to B on A's death. At B's death there will be a Federal and New York State estate tax due of approximately $260,000. Had B made a qualified disclaimer within the nine month period after A's death, no Federal estate tax would be due. There would be, however, a New York State estate tax on the first death of approximately $28,000 and on B's death of approximately $23,000. (See Figures 1 and 2.)

The disclaimer of a survivorship interest in property that is jointly owned by spouses is a useful post-mortem planning technique to employ where there is insufficient separate property to take advantage of the full unified credit in the estate of the first spouse to die.

The Current Regulations

Disclaimer of Jointly Owned Property. The current regulations provide, in general, that in order to be a qualified disclaimer under IRC section 2518, 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.

Reg. section 25.2518-2 (c)(4)(ii) provides a special rule with respect to joint tenancies between spouses and tenancies by the entirety in real property created after 1976 but prior to 1982. Under this provision, an interest in a tenancy created between 1976 and 1982 can be disclaimed within nine months of the date of death of the first joint tenant to die, provided no election was made under former section 2515 to treat the creation of the tenancy as a gift. The disclaimant can disclaim up to the portion of the tenancy included in the decedent's gross estate under IRC section 2040.

Current regulations validity (with respect to joint interests that are unilaterally severable) has been the subject of repeated litigation. In Kennedy v. Commissioner, 804 F.2d 1332 (7th Cir. 1986), the court held that the surviving spouse's survivorship interest in the decedent's one-half interest in jointly held real property was created on the decedent's death. Prior to that time, the decedent could have unilaterally severed the interest and defeated the spouse's survivorship right in that interest. Accordingly, the court held that the survivorship interest could be disclaimed within nine months of the decedent's death. The court concluded that the current regulations are invalid to the extent that they require a survivorship interest in a severable joint tenancy to be disclaimed within nine months of the creation of the tenancy. In Estate of Dancy v. Commissioner, 872 F.2d 84 (4th Cir. 1989) (involving personal property), and McDonald v. Commissioner, 853 F.2d 1494 (8th Cir. 1988) (involving real property), the courts also held the regulations invalid.

In McDonald, the Eighth Circuit remanded the case to the Tax Court to determine if the disclaimer was otherwise qualified under IRC section 2518. On remand, the IRS argued that since the joint property was attributable entirely to consideration furnished by the disclaiming spouse, the spouse could not disclaim any interest in the property under IRC section 2518. The Tax Court rejected this argument (McDonald v. Commissioner, T.C.M. 1989-140).

The IRS announced in A.O.D. 1990-06 (Feb. 7, 1990) that it will follow these decisions.

Disclaimer of Joint Bank Accounts. For gift tax purposes, the creation of a joint bank account is generally treated as an incomplete transfer where the contributing joint tenant may unilaterally withdraw contributed funds without the consent of the other joint tenant [Treas. Reg. section 25.2511-l(h)(4)]. Accordingly, unless a noncontributing joint tenant has withdrawn the funds, the transfer to a joint bank account does not become complete before the death of the first joint

However, if the contributing joint tenant must account for some part of the withdrawn amount, then he or she has made a completed gift upon the creation of the joint account. This would be the case under section 675 of New York's Banking Law, which provides that the opening of a joint account with right of survivorship creates a rebuttable presumption of a joint tenancy in the account. Once such a joint tenancy is established, there is a transfer by the contributing tenant to the other tenant of a half interest in the funds on deposit. Thus, each joint tenant may withdraw, unilaterally, without the consent of the other, up to half the fund. In short, the noncontributing tenant becomes the legal owner of half the fund, and the contributing tenant may not, without the other's consent, withdraw more than half the fund or replace the other tenant.

The Proposed Regulations

Disclaimer of Jointly-Owned Property. The proposed amendments would revise the regulations to provide that, in general, if a joint tenancy may be unilaterally severed by either party, then a surviving joint tenant may disclaim the one-half survivorship interest in property held in joint tenancy with right of survivorship within nine months of the death of the first joint tenant to die, even if the surviving joint tenant provided some or all of the consideration for the creation of the

The rationale of the courts in Dancy, Kennedy, and McDonald does not apply to joint interests that cannot be unilaterally severed under applicable state law, such as interests held in tenancy by the entirety. Under New York law, in tenancies by the entirety, the donee spouse's joint interest in the property that cannot be unilaterally severed is created on the date the tenancy is created. Therefore, the proposed amendment to the regulations would reaffirm that any interest in a nonseverable co-tenancy, including the survivorship interest, must be disclaimed within nine months of the date of the creation of the tenancy, and only to the extent the interest is not attributable to consideration furnished by the disclaiming person. The IRS, however, is requesting comments on whether or under what circumstances--e.g., tenancy by the entirety ownership of a personal residence-- the rule applicable to unilaterally severable interests should apply to interests that are not unilaterally severable.

The proposed amendments would extend the special rule in Regulation section 25.2518-2(c)(4)(ii), discussed above, to tenancies created after December 31, 1954, and on or before December 31, 1981.

Disclaimer of Joint Bank Accounts. The proposed regulations include specific rules that address the disclaimer of joint bank accounts. These rules provide that, in the case of a transfer to a joint bank account, if the transferor may unilaterally withdraw his own contributions without the consent of the co-tenant, the transfer creating the survivor's interest in the decedent's share of the funds remaining in the bank account at the death of the first joint tenant to die occurs at that tenant's death. Thus, the nine-month period for making the qualified disclaimer commences on the death of the first joint tenant.

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. These contributed funds are property owned by the survivor during the co-tenancy, and the survivor cannot disclaim property the survivor has always owned and never transferred. Thus, in the case of a New York joint bank account (unless the statutory presumption of a gift can be rebutted), the surviving tenant can disclaim only half of the amount in the account. Further, the proposed regulations clarify that this rule applies even if only one-half of the property is included in the decedent's gross estate under IRC section 2040(b) because the joint tenants are married.

These rules are also made applicable to joint brokerage accounts, since the transfer tax treatment of these accounts generally parallels the treatment of joint bank accounts.

Proposed Effective Dates. The amendments to Regulation section 25.2518-2(c)(4) are proposed to be effective for disclaimers made after the date these regulations are published in the Federal Register as final regulations. *


By Nathan Szerlip, CPA,
Edward Isaacs & Company, LLP

IRC section 2503(b) allows a person to transfer up to $10,000 annually to each donee, free of gift taxes, so long as the donee is given a present interest in the gift. Regulations define a present interest as an unrestricted right to the immediate use, possession, or enjoyment of the property or income from the property [Treas. Reg. Sec. 25.2503-3(b)]. This $10,000 annual exclusion is increased to $20,000 if the donor is married and the spouse consents to split the gift with the donor. Through annual exclusion gifts, a donor removes assets and their subsequent appreciation and future income from the estate and thus reduces the amount of the estate subject to estate taxes. The use of annual exclusion gifts has become one of the basic tools of estate planning.

When gifts are made, however, through a power of attorney, this basic tool can fail especially when the power is not carefully drafted. In the Estate of Sylvia P. Goldman, T.C.M. 1996-29, the court increased the decedent's estate by $160,000, the value of gifts given through use of a power of attorney. In Goldman, the decedent had executed a standard bank power of attorney exercisable by either of her two daughters. The power gave the daughters complete authority to do anything necessary to conduct business with the bank as if the decedent were personally conducting such business. Approximately one month before the decedent's death, one of the daughters acting as the attorney-in-fact wrote $10,000 checks to herself, her husband, her two children, her sister, her sister's husband and her sister's two children; eight checks were written in December 1990 and eight in January 1991. During this period decedent had also written checks as gifts but in amounts not exceeding $1,000. Decedent died January 29, 1991.

Upon examination, the IRS added back to the estate the value of the sixteen $10,000 checks. In ruling for the IRS, the court found no intent to make such a gift. The court observed that decedent's pattern of gift giving did not show an intent to make such large gifts. Decedent herself had written numerous checks of only modest amounts as gifts to family members during the period before her death. Since none of the decedent's checks exceeded $1,000, the court concluded that there was no intent to make the gifts of $10,000.

Furthermore, the daughter as attorney-in-fact did not have the right to make gifts. Unless explicitly given in the instrument, a power of attorney does not give the attorney-in-fact the right to make gifts under New York State law. The power of attorney used in this case was a standard bank power that authorized the power holder to conduct any
necessary and proper business with the bank. The court found the necessary and proper business was limited to the powers explicitly granted in the instrument, in this case, to open and close accounts, deposit and withdraw money, and write checks. Absent explicit language in the power of attorney granting the right to give gifts and a pattern of gift giving to show an intent to give such gifts, the court was forced to find the gifts were includable in the estate.

The Estate of Goldman emphasizes the importance of a property drafted power of attorney for use in estate planning. If the decedent had a power of attorney explicitly granting the right to make annual exclusion gifts, including gifts to the power holder, the $160,000 in gifts would not have been added back to the estate.

To lessen Goldman type occurrences, the New York State power of attorney has been modified, effective January 1, 1997, to allow the power holder to make gifts not exceeding $10,000 per person per year to the principal's spouse, children, more remote descendants, and parents. If gifts exceeding the annual $10,000 limits or to persons other than those enumerated above are contemplated, an additional power must be added to the power of attorney. *

Marco Svagna, CPA
Lopez Edwards Frank & Company LLP

Lawrence Foster, CPA
KPMG Peat Marwick LLP

Contributing Editors:
Richard H. Sonet, CPA
Marks Shron & Company LLP

Lawrence M. Lipoff, CEBS, CPA
Lipoff and Company, CPA, PC

Frank G. Colella, LLM, CPA
Own Account

Jerome Landau, JD, CPA

Eric Kramer, JD, CPA
Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.

James McEvoy, CPA
Chase Manhattan Bank



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