ESTATES AND TRUSTS

October 2000

Qualified Disclaimers: An Effective, Overlooked Postmortem Estate Planning Tool

By Marvin L. Korobow, Esq., CPA

When a decedent has done little or no estate planning, or bad estate planning, is it too late? Actually, all is not lost, because of a favorite postmortem estate planning technique: the qualified disclaimer (QD).

A QD under IRC section 2518 is a handy, near-magical tool that allows estate planning to be done by the personal representatives (e.g., executors and administrators) and beneficiaries for two estates at the best possible time: after the death of the testator. At this time, the size, nature, and details of the estate and the needs, ages, health, wealth, and family circumstances of the beneficiaries are definitively known.

The QD can save taxes, not only in the estate of the decedent, but also in that of the survivor. The QD permits the decedent to rule from the grave and effectively rewrite the will. Its anticipated possible use after death permits some premortem planning as well, when drafting wills, trusts, and powers of appointment.

Uses

The scope of the QD’s uses for estate planning runs the gamut of the IRC sections relating to transfer tax and is only limited in application by the knowledge, skill, and creativity of the estate planner in using those sections along with the other provisions of federal tax law and applicable state laws.

To be effective under IRC section 2518 the disclaimer must—

  • be irrevocable and unqualified,
  • be in writing,
  • be delivered to the transferor of the interest, the legal representative (usually the executor or administrator of an estate), the title holder of the property, or the person in possession of the property, no later than nine months after the later of 1) the day on which the transfer that created the interest is made or 2) the day the disclaimant reaches age 21,
  • be made before the disclaimant has accepted the interest disclaimed or any of its benefits, and
  • not direct the disposition of the disclaimed property.

    With careful application of the technical rules under IRC section 2518, the QD can be used, among other things, to—

  • increase a marital deduction where it has been underutilized
  • take advantage of the $675,000 unified credit where the marital deduction has been overutilized
  • equalize a married couple’s estate where it is beneficial to do so
  • perfect a QTIP election where it is beneficial to do so (LTRs 8817031 and 8546007)
  • save an improperly drafted credit shelter trust that inadvertently gives the income beneficiary a general power of appointment (Note: A power of withdrawal that is limited to an ascertainable standard is applicable.)
  • reduce a disclaimant’s already large taxable estate (Note: The generation-skipping transfer tax should also be considered.)
  • save a charitable deduction for a defectively drafted trust intended for charity
  • deflect an income interest from a high-bracket family member to a low-bracket family member, thereby lowering overall income taxes
  • deflect a legacy not needed by the disclaiming party to someone else without incurring gift or estate taxes
  • reject a general power of appointment held at the donee’s death without incurring any gift tax liability and thereby avoiding inclusion of the property subject to the power in his or her estate.

    If a will contains an appropriate provision, a valid QD can be made by a surviving spouse even though the disclaimed interest will pass to a trust in which the spouse has an income interest (e.g., a credit shelter or bypass trust).

    A disclaimer can be partial [NY EPTL 2-1.1 1 (e)] or complete, and can be made by—

  • a donee or transferee
  • a fiduciary (with court approval) on behalf of an infant, incompetent, conservatee, or decedent [NY EPTL 2-1.1 1 (c)]
  • the holder of a power of attorney (LTR 9015017).

    In every estate, the CPA, together with the attorney, should analyze the situation to make the most effective use of this valuable postmortem tool.

    Editors:
    Lawrence M. Lipoff, CPA
    Deloitte & Touche LLP

    Susan R. Schoenfeld, JD, LLM, CPA
    Bessemer Trust Company N.A.

    Contributing Editors:
    Jerome Landau, CPA

    Debra M. Simon, CPA
    Merdinger Sruchter Rosen & Corso P.C.

    Richard H. Sonet, JD, CPA
    Marks Paneth & Shron LLP

    Peter Brizard, CPA

    Ellen G. Gordon, CPA
    Margolin Winer & Evens LLP

    Jeffrey S. Gold, CPA
    Joseph R. Beyda & Company P.C.

    Harriet B. Salupsky, CPA
    Weinick Sanders Leventhal & Company LLP

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