Disclaimers and Private Foundations

Recently, Letter Rulings 200518012 and 200519042 held that disclaimers were qualified, despite the fact that the disclaimant maintained a role with respect to private foundations that received the disclaimed property.

Background

A disclaimer occurs when a person entitled to inherit certain property decides to decline it. The property then passes to another beneficiary according to the will. Disclaimers are an important part of estate planning; Sec. 2518 provides that if a person makes a qualified disclaimer as 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 purposes of the Federal estate, gift and generation-skipping transfer (GST) tax provisions. Disclaimers can be used for post-mortem planning, to qualify the estate for a charitable or marital deduction, or to allow use of unused GST tax exemptions.

Example: As will leaves certain assets to his surviving spouse, B, and his residuary estate equally to his two children, C and D. If B made a qualified disclaimer of any of the property that she would otherwise receive, it would pass equally to C and D as part of the residue.

Qualified Disclaimers

To qualify under Sec. 2518(b), a disclaimer must be:

• Irrevocable and unqualified;

• In writing; and

• Received by the transferor of the interest or his or her legal representative no later than nine months after the date on which the transfer creating the interest in the person making the disclaimer is made, or the date on which the person making the disclaimer attains age 21.

Further, the person making the disclaimer cannot receive the interest or any of its benefits; and, as a result of the disclaimer, the interest must pass, without any direction on the disclaimants part, to the decedents spouse or to a person other than the disclaimant.

Because a disclaimer must meet all of the above requirements, it can be difficult to use effectively. If it is not qualified, it is disregarded; the disclaimant is then treated as having received the property and made a subsequent transfer (and potentially, as having made a gift). Many letter rulings are requested each year on disclaimers, as taxpayers want to ensure they meet Sec. 2518s requirements.

Donor-Advised Fund

Facts: In Letter Ruling 200518012, the decedent left tangible personal property to her seven surviving grandchildren in equal shares. Her will indicated that if a beneficiary disclaimed any portion of his or her share of the inheritance, that portion would be distributed to a trustee of a sub-fund named for such grandchild as a donor-advised fund, under a separate agreement that established the fund as a part of a valid private foundation. The grandchild would then serve as an adviser to the sub-fund for his or her life. The taxpayer requested a ruling that written disclaimers by each of the seven grandchildren would constitute qualified disclaimers of the property and qualify the estate for an estate tax charitable deduction on the disclaimed property.

Ruling: The IRS first analyzed Regs. Sec. 25.2518-2(d)(1), which states that the acceptance of consideration in return for making a disclaimer is deemed an acceptance of the benefits of the entire interest disclaimed. According to Regs. Sec. 25.2518-2(d)(2), if a beneficiary who disclaims an interest in property is also a fiduciary, he or she cannot retain a wholly discretionary power to direct enjoyment of the disclaimed interest. Under Regs. Sec. 25.2518-2(e)(1)(i), the disclaimant cannot, either alone or in conjunction with another, direct the redistribution or transfer of the property to another.

The Service then looked to the foundations operation. Each disclaimant could only make advisory recommendations to the foundations trustee as to proposed property distributions. The trustee had the final decision and was subject to strict guidelines, requiring a determination that a distribution was consistent with the foundations charitable goals. Thus, the IRS ruled that written disclaimers made by the seven grandchildren would allow the property to pass to each sub-fund without direction on the disclaimants part. As long as each disclaimer met Sec. 2518s requirements, the proposed disclaimers would be qualified, and the estate would be entitled to a charitable deduction.

Private Foundation

Facts: In Letter Ruling 200519042, the will provided that if the decedents daughter disclaimed any of her inheritance, it would pass to a private foundation of which she and her husband were officers and directors. The foundations board of directors proposed to amend its charter and bylaws to ensure that no one person had the sole discretion to direct the distribution of funds received from the estate, by segregating property received from it into a separate fund, from which distributions required a special committees approval. The disclaimant would not be eligible to serve on this special committee.

Holding: The Service ruled that the daughters disclaimer would be a qualified disclaimer, if the foundation made the proposed changes to its charter and bylaws. Further, the estate was eligible for a charitable deduction.

Conclusion

Disclaimers can be quite difficult to execute properly. However, when done appropriately, they can be a great asset in post-mortem estate planning.

From Alane L. Boffa, CPA, MT, Cohen & Company, Akron, OH