ESTATES AND TRUSTS

By Max Wasser, CPA, Wasser Brettler Klar & Lipstein LLP

A recent Eighth Circuit decision in Walshire v. U.S. [288 F.3d 342 (8th Cir., 2002)] upheld a lower court’s holding that disclaiming a remainder interest while retaining a life estate does not qualify as a valid disclaimer under IRC section 2518.

Walshire v. U.S.

Edward M. Walshire received a one-fourth interest in the residue of his brother’s estate when his brother died testate. Walshire executed a timely disclaimer of his remainder interest but retained the income interest in the property during his life. Since Walshire’s children were contingent beneficiaries under the will, they would have received any property that Walshire disclaimed from his brother’s estate. Walshire received his share of the estate in the form of checks, which he exchanged into certificates of deposit. After Walshire died, his executors did not include the value of the CDs in his estate, because of the disclaimer that had been made of the property from which the CDs originated.

The IRS determined that the disclaimer was not a “qualified disclaimer” for estate tax purposes, and assessed estate taxes and penalties based on the excluded CDs. The District Court for the Northern District of Iowa agreed with the IRS.

A transferee may disclaim an “undivided portion” of a transferred interest. IRC section 2518(c) and Treasury Regulations section 25.2518-3(b) require that the “undivided portion” consist of a fraction or percentage of each and every substantial interest or right owned by the disclaimant in such property. It must also extend over the entire term of the disclaimant’s interest in such property, and over the property into which such property is converted.

The executors of Walshire’s estate argued that the regulations were invalid and contrary to the plain language of IRC section 2518(a), which allows a disclaimer of “any interest in property.” Their contention was that a remainder interest is by itself any interest in property. The court cited IRC section 2518(c), which says that only an undivided portion of an interest may be disclaimed. While the IRC does not specifically define undivided portion of an interest, the court concluded that it is a portion that does not separate out the bundle of rights associated with the interest being apportioned. By apportioning a fee into a life estate and remainder interest, one does not give the remainder interest all of the rights associated with a fee interest, because the remainder is denied the right to immediate possession, one of the basic rights of a fee holder.

Alternative strategies. Walshire could have fulfilled his intentions by disclaiming a percentage of his entire interest equivalent to the value of the remainder interest which he had disclaimed. If, for example, such a remainder interest was equivalent in value to one-fourth of the value of property that Walshire received from this brother’s estate, then Walshire would have been entitled to the income and principal of three-quarters of such property during his life. By disclaiming one-fourth of his interest in the property, the recipients of the disclaimed portion would be entitled to all of the associated rights. This strategy would have nullified the basis of the court’s argument disallowing the disclaimer.