Interests Created Before January 1, 1977: When a Disclaimer Is Valid for Federal Tax Purposes

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By Kathleen Ford Bay, Esq.

Lippincott Phelan Veidt PLLC, Austin, TX

Reg.  §25.2511-1(c)(2) provides  that, in the case of transfers made by a decedent at death before  January 1, 1977, a beneficiary's disclaimer will be valid if the governing law gives that beneficiary a right completely and unqualifiedly to refuse to accept ownership of property transferred. The refusal to accept ownership does not constitute the making of a gift if the refusal: (1) is made within a reasonable time after knowledge of the existence of the transfer; (2) is unequivocal; (3) is effective under local law; and (4) is made before the beneficiary has accepted the property.1

In  three recent private letter rulings — PLR 201440007, PLR 201407009 and PLR 201403005 —  the IRS ruled that the disclaimer of a contingent interest in a trust  within nine months of the beneficiary reaching the age of majority  was valid for federal tax purposes. In each of the three rulings,  the taxpayer wanted to disclaim an interest in a pre-1977 trust upon  turning 18. Under the terms of each trust, in addition to being a  contingent remainderman, the taxpayer was among a class of beneficiaries  to whom the trustees had the current discretion to make distributions  of income or principal "in event of illness, accident, other  misfortune, or any emergency, or if in the trustees' judgment, it  is necessary to provide for the beneficiaries' comfortable maintenance,  support, or education"; however, no such distributions were  ever made.

Practice  Tip:  When presented with the disclaimer of any interest created  before January 1, 1977, in addition to reviewing the regulations,  practitioners should review Jewett  v. Commissioner,2 which provides additional guidance on  the first condition (i.e., the refusal to accept ownership must be  effective under the law governing the administration of the decedent's  estate) for a pre-1977 disclaimer.

For more information, in the Tax Management Portfolios, see Cline, 848 T.M., Disclaimers — Federal Estate, Gift and Generation-Skipping Tax Considerations,  and in Tax Practice Series, see ¶6350, Estate Planning.

 1 See §2518 and  Reg. §25.2518-1 through  §25.2518-3 for  rules for determining whether a disclaimer is qualified for estate  and gift tax purposes when that interest was created by a transfer  made after December 31, 1976. Unless otherwise specified, all "Section"  or "§" references refer to the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

 2 455 U.S. 305 (1982).