Vow of Poverty Was Not a Disclaimer

Estate planning normally occurs during an individual’s life. However, critical planning can also occur after the taxpayer’s death. In Letter Ruling (TAM) 200437032, the IRS ruled that a legacy to a member of a religious order who had taken a vow of poverty did not qualify for the estate tax charitable deduction under Sec. 2055.

Facts

The decedent’s sister was a member of a Roman Catholic religious order. As a member, she had taken a perpetual (i.e., lifetime) vow of poverty. Effectively, all of the assets she might own after the vow would belong to the order. An outright bequest to the order itself would have qualified for a charitable deduction.

The decedent left his estate to his sister. His will provided a contingent legacy to the order, had she predeceased him. More than nine months after the decedent’s death, the sister transferred all of the assets to the order, but did not execute a disclaimer.

Arguments

The estate contended that the sister had made a valid disclaimer and proposed several arguments to support an estate tax charitable deduction. First, it claimed that the vow taken by the decedent’s sister qualified as a disclaimer under Sec. 2518(a). The IRS responded that this did not qualify as a disclaimer, because the vow was not in accordance with state law regarding disclaimers, as required by Sec. 2518(b).

The estate also claimed that the vow and subsequent transfer of assets to the order constituted a valid disclaimer under Sec. 2518(c)(3). The IRS again disagreed, citing case law, legislative history and its own rulings.

Lastly, the estate, citing Sec. 2055(a)’s flush language, claimed that the vow constituted a termination of the sister’s interest in the legacy. Without much explanation, the IRS stated that the flush language did not apply in this case.

Thus, the estate was denied a charitable deduction for the assets passing to the order.

Estate Planning

To ensure that the payment to the order would qualify as an estate tax deduction, the will should have provided for a direct legacy to it. If the decedent wanted to provide for his sister if she left the order, the will could have stated: “In the event that my sister is no longer subject to a vow of poverty at my death, I give her my residuary estate, but if she is subject to such a vow, I give my residuary estate to the order.”

Postmortem Planning

There seems to be no question that the residuary legatee (i.e., the sister) should have executed a disclaimer, allowing the estate to take a charitable deduction and the entire residuary, without related estate tax, to pass to the order.

The Bottom Line

The effect of not having a valid disclaimer? The religious order will have to bear the entire estate tax on the bequest.

From Paul J. Weireter, CPA, New York, NY