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April 1993

Disclaimers and the marital deduction. (Estates & Trusts)

by De Rosa, Albert

    Abstract- Regulations on disclaimers and marital deduction are reviewed in relation to the case of a decedent who passed away leaving a valid will for her community estate to her spouse and two sons. Since the trust does not qualify the spouse for the marital deduction, he and the sons agreed to forego the decedent's will and let the property pass by intestacy. At the same time, the two sons made a disclaimer on their interest in the property. Under IRC Sec 2518, the disclaimed interest is dealt with as though it had never been given to the disclaiming sons. However, the IRS expressed that the agreement not to probate the will and permit the state to go intestate are not really needed. The spouse could have also just made a disclaimer. Under Sec 2056(a), property transferred to the two sons in accordance with the will and then disclaimed by them is allowed to directly pass from the decedent to the spouse and is thus qualified for a marital deduction.

Within nine months of the decedent's death, the surviving spouse and the two sons, entered into an agreement not to probate the will of the decedent and to allow the estate to pass by intestacy. On that day the two sons disclaimed all interest in the decedent's estate except for $413,000. The spouse and sons obtained an order from the Texas probate court declaring that they were the only heirs of the decedent.

Texas law provides that when a spouse dies intestate leaving a surviving spouse and child or children, the surviving spouse retains his or her community share of the property and the decedent's community half passes to their children. If the decedent dies intestate leaving only a surviving spouse, the entire community estate passes to the surviving spouse.

The personal representatives filed a Federal estate tax return for the decedent's estate, claiming a marital deduction for all amounts in excess of the $413,000 plus expenses and claims against the estate.

Applicable Law

IRC Sec. 2518 provides that if a person makes a qualified disclaimer with respect to any interest in property, the disclaimed interest is treated as if it had never been transferred to the person making the qualified disclaimer for purpose of the Federal estate and gift tax provisions.

The term "qualified disclaimer" is defined in IRC Sec. 2518(b) as an irrevocable and unqualified refusal to accept an interest in property, that satisfies the following conditions:

1. The refusal must be in writing;

2. The written refusal must be received by the transferror of the interest or his legal representative no more than nine months after the later of a) the day on which the transfer creating the interest is made, or b) the day on which the person making the disclaimer reaches age 21;

3. The person making the disclaimer must not have accepted the interest or any of its benefits prior to the disclaimer; and

4. As a result of the disclaimer, the interest must past without any direction on the part of the person making the disclaimer to the decedent's spouse or to a person other than the person making the disclaimer. IRC Sec. 2518(c)3 provides that a written transfer of the transferor's entire interest in the property that meets requirements 2) and 3) above and is to a person or persons who would have received the property had the transferor made a qualified disclaimer shall be treated as a qualified disclaimer for the purposes of IRC Sec. 2518.

Discussion of the Issues

The IRS noted that the disposition of the decedent's estate that results from the agreement not to probate the will and to allow the estate to pass by intestacy, coupled with the sons' disclaimers could have been achieved by using only disclaimers.

The surviving spouse made a transfer to his sons of the property interest he would have received under the will when he signed the agreement not to probate the will. The effect of this transfer could have been achieved with a disclaimer by the spouse. The transfer occurred within nine months of the decedent's death and the surviving spouse had not received the interest or any of the benefits. The transfer was valid under state law. Thus, the spouse made a qualified disclaimer of his entire income interest meeting the requirements of Sec. 2518(c)3. The entire estate would thereby have passed to his sons.

The two sons made the disclaimer in writing and delivered it to the executor within nine months of the decedent's date of death. The disclaimants had not received the interest or accepted any of its benefits.

Sec. 25.2518-3(b) of the Gift Tax Regulations provides that a disclaimer of a specific pecuniary amount out of a pecuniary or non-pecuniary bequest which satisfies the other requirements of a qualified disclaimer under Sec. 2518(b) is a qualified disclaimer provided that no income or other benefit of the disclaimed amount inures to the benefit of the disclaimant either prior to or subsequent to the disclaimer.

Thus, the sons may disclaim a specific pecuniary amount or amount based on a formula (i.e., all amounts in excess of a specific pecuniary amount) from the property disclaimed by the spouse. Under Texas intestacy laws, this disclaimed amount passes without direction on the part of the disclaimants to the surviving spouse since the sons are deemed to have predeceased the decedent, and the surviving spouse is deemed to be the only living heir to the decedent. Therefore, the disclaimer made by the two sons, is a qualified disclaimer for purposes of Sec. 2518.

A marital deduction is allowed for the value of an interest in property that is included in the gross estate and that passes from the decedent to the decedent's surviving spouse |Sec. 2056(a).

The regulations provide that if an interest in property passes from a decedent to one other than the surviving spouse in a taxable transfer, and the person makes a qualified disclaimer, and the surviving spouse becomes entitled to such interest in property as a result of the disclaimer, the property is treated as passing directly from the decedent to the surviving spouse. Therefore, the property that passes to the two sons under the will and then was disclaimed by the sons is deemed to pass directly from the decedent to surviving spouse and is eligible for a marital deduction under Sec. 2056(a).

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