Wednesday, May 18, 2011

An Irrevocable Disclaimer? Think Again!

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Good lawyering appears to have rescued Craig Breakiron from a $2.3 million gift tax liability. The story begins in 1995, when Craig's parents each created a qualified personal residence trust (QPRT) funded with undivided 50% interests in real estate on Nantucket Island. Each QPRT had a 10-year term, after which the property was to pass to their children Craig and Laura as tenants in common.

In 2005, the QPRTs terminated and Craig and Laura acquired the property. A few months later, Craig decided that he did not want the property and consulted an attorney to determine if he could convey his interest to Laura at little or no gift tax cost. The attorney recommended a disclaimer, mistakenly assuming that the nine-month period for a tax-qualified disclaimer under IRC §2518 began at the termination of the trust, not at its inception.

Five months after the trusts terminated, Craig executed two disclaimers, one for each trust, and title was conveyed to Laura as sole owner. Craig soon learned that the disclaimers were not qualified for gift tax purposes, and the IRS followed up with a $2.3 million gift tax assessment.

In court, Craig's attorney took the position that the disclaimers were ineffective under Massachusetts law, because they were executed on the basis of a mistake, i.e., that they would be effective for gift tax purposes. The district court agreed, stating that there was "no question" that Craig was entitled to rescission of his disclaimers under Massachusetts law. The court further noted that, because the IRS was party to the proceedings, the rescission was effective for gift tax purposes and that Craig owed no tax. Breakiron v. Gudonis, No. 09-10427-RWZ (D. Mass. 8/10/10).

Harold W. Pskowski, Managing Editor, Estates, Gifts and Trusts

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