Why Look a Gift Horse in the Mouth? Why Disclaimers May or May Not Work..

In the estate tax planning world you can  “disclaim” a gift or bequest and avoid unfavorable tax consequences. How does a disclaimer work? Let’s say Uncle Don dies and in his Last Will and Testament he provides that his daughter, Gloria, is to receive a $100,000 distribution, and if Gloria predeceases Uncle Don, then the distribution is to be distributed to Gloria’s daughter, Anne. Gloria decides she does not want or need the $100,000 after Uncle Don has died.

If Gloria actually received the money and then gave the money to Anne, then Gloria’s gift  would be subject to gift taxes. However if Gloria “disclaims”  the gift within the appropriate time period, the law treats Gloria as predeceasing Uncle Don and Uncle Don’s Last Will and Testament, by its terms, provides that if Gloria had predeceased Don the gift would be distributed to Anne. This disclaimer avoids Gloria’s negative gift tax consequences.

But why in the world would Gloria or ANYONE disclaim??? In the past it is usually because the recipient has plenty of money and to avoid the gift tax or estate tax (if the recipient kept the money until their death).

Another reason to disclaim is that Gloria may believe that she could avoid a creditor receiving any money. Assume Gloria owes the IRS $100,000 and Gloria knows that once she receives the $100,000 from Uncle Don’s estate, the IRS will immediately seize that money.  Gloria decides to disclaim in favor of her daughter, Anne, knowing that Anne will share the money with Gloria after Anne receives it. The IRS doesn’t get the money and Gloria and Anne get the benefit. Right? WRONG!!!

A recent case, Deinlein v. US, citing the prior United States Supreme Court case of Drye v. US determined that an individual can NOT disclaim and avoid the IRS claim. In this case, Mr. Deinlein owed taxes to the IRS. His mother died leaving him a 1/3 interest in her estate. He disclaimed his interest under Kentucky law. The court found that under Section 6321 of the Internal Revenue Code  the IRS can impose a lien for a tax deficiency on all property. The property rights are determined by state law and because the disclaimant can exercise dominion over the property by determining whether the property will remain with him or pass to another person, the taxpayer retains some state property rights such rights are sufficient to create property rights for purposes Section 6321. Thus, the lien could be satisfied by the disclaimed property.

ADVICE: Disclaimers are deceptively simple. You should always hire an attorney if you choose to disclaim as  Chapter 739 of the Florida Statutes provides Florida requirements of valid disclaimers and Section 2518 of the Internal Revenue Code has even more stringent requirements for tax qualified disclaimers. This is NOT a do it yourself matter!!! Also be sure that if you have any idea of disclaiming do NOT take any benefits from the property you are disclaiming and see an attorney immediately. For the tax advantages you only have 9 months from the date of death or other event that results in the gift.

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