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Nonqualified Disclaimers of IRA Also Did Not Qualify for Marital Deduction

Estate Planning Journal

In Ltr. Rul. 200846003, the IRS concluded that disclaimers of an IRA were not qualified disclaimers since the disclaimants did not disclaim their entire interest in the IRA. In addition, the IRS ruled that because the disclaimers were not qualified disclaimers, the IRA did not qualify for the estate tax marital deduction even though, as a result of the disclaimers, the IRA passed to a QTIP trust for the benefit of the decedent's spouse.

Facts

The decedent and her husband entered into a prenuptial agreement that provided that she would execute a will establishing a testamentary trust for the benefit of her husband and that she would designate that trust as the beneficiary of her IRA. The decedent's will provided for a specific bequest of the IRA to the trust. The terms of the testamentary trust provided that the decedent's husband was to receive the income of the trust for his lifetime. The will provided that upon the husband's subsequent death, the trust would terminate, and the remaining trust property would be distributed to a second trust that provided that the trust property would be distributed equally among the decedent's four children.

Sometime later, when the decedent moved her IRA to another account, she executed a new beneficiary designation form naming her four children as the beneficiary of her IRA. The decedent did not designate any contingent beneficiary of the IRA. The custodial agreement for the IRA provided that since the decedent did not designate a contingent beneficiary, if the primary beneficiaries predeceased the decedent, the decedent's estate would be the beneficiary of the IRA. Upon the decedent's death, she was survived by her husband and her four children.

Within nine months of the decedent's death, her four children disclaimed their interest in the IRA in writing, delivered the disclaimers to the executors of the estate, and filed the disclaimers with the court. None of the decedent's four children accepted any of the income or other benefits of the IRA prior to executing the disclaimers. The disclaimers were valid under state law. The decedent's children did not disclaim their interests in the second trust which was the remainder beneficiary of the testamentary trust. As a result of these disclaimers, the IRA passed to the decedent's estate and pursuant to the terms of the decedent's will was distributed to the trust for her husband's benefit.

Analysis

The IRS addressed two issues in this ruling: (1) whether the disclaimers by the decedent's four children were qualified disclaimers for federal tax purposes, and (2) whether the resulting transfer of the IRA to the testamentary trust for the benefit of the decedent's husband qualified for the federal estate tax marital deduction.

With respect to the first issue, based on Reg. 25.2518-2(e)(3), the IRS ruled that the disclaimers by the decedent's four children were not valid disclaimers for federal tax purposes. The Regulation provides that a disclaimer of property by a person (other than the surviving spouse) who also has a right to receive the disclaimed property as an heir at law, residuary beneficiary, or by other means will not be a valid disclaimer unless the disclaimant disclaims these rights as well. The Regulation also provides the following example: “if a disclaimant who is not a surviving spouse receives a specific bequest of a fee simple interest in property and as a result of the disclaimer of the entire interest, the property passes to a trust in which the disclaimant has a remainder interest, then the disclaimer will not be a qualified disclaimer unless the remainder interest in the property is also disclaimed.” Relying on the Regulation and the fact that the decedent's four children did not disclaim their interest in the second trust that was the remainder beneficiary of the testamentary trust, the IRS concluded that the disclaimers by the decedent's four children were not qualified disclaimers for federal tax purposes.

With respect to the second issue, the IRS found that the transfer of the IRA to the testamentary trust for the benefit of the decedent's husband did not qualify for the federal estate tax marital deduction. The IRS stated that since the disclaimers were not qualified disclaimers for federal tax purposes, the decedent's four children made taxable gifts of the IRA to the testamentary trust. Thus, the IRA passed to the testamentary trust not from the decedent but rather from her four children. In order for an asset to qualify for the federal estate tax marital deduction, Section 2056(a) requires that the asset pass from a decedent to his or her spouse. Accordingly, because the IRA passed to the trust from the decedent's children and not from the decedent, the IRS ruled that the decedent's estate was not entitled to a federal estate tax marital deduction for the IRA.

Comments

While this ruling is not groundbreaking, it is nevertheless a very useful reminder of one of the essential requirements of a disclaimer which is set forth, not in the Code, but rather in the Regulations. Practitioners must remember that in addressing a disclaimer by a beneficiary who is not the spouse of the decedent, the disclaimer will be qualified only to the extent that the disclaimaint disclaims all rights to receive or benefit from the property either as an heir at law, residuary beneficiary, or by other means. By not adequately addressing this issue, not only did the decedent's children make a taxable gift, but the IRA did not qualify for the estate tax marital deduction.

Frank S. Baldino is an attorney at Lerch, Early & Brewer in Bethesda, Maryland who practices in the areas of estate planning and probate administration and who co-chairs the firm's Estate Planning and Probate Group. He has extensive experience in the areas of estate planning, charitable giving, estate planning for non-U.S. citizens, tax planning with respect to retirement plans and stock options, asset protection planning, business succession planning and estate and trust administration. Frank may be contacted at 301-657-0715 or fsbaldino@lerchearly.com.

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