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I. Basics of Disclaimer Trust
A. Assets are held in a trust which, at the death of the first spouse to
die the Surviving Spouse can revoke and amend. See Probate
Code § 267(b)(3)
B. Trust needs to state that if within nine (9) months [Treasury
Regulation 25.2518-2(c)(5) & Probate Code § 279] of the first
spouse to die's death, the Surviving Spouse disclaims all or any
fraction of the assets or of selected assets, such property will be
held under a Bypass/Exemption/Credit-Shelter Trust. See Probate
Code § 282.
i. The gift tax rules will apply as if the disclaimed interest had
never been transferred to the person making the disclaimer.
a. The disclaimed property will not be treated as part of
the estate of the person making the disclaimer for
estate tax purposes (Treasury Regulation 20.2046-1)
or for generation skipping transfer tax purposes.
(Internal Revenue Code § 2654(c)).
ii. Where Surviving Spouse intended to disclaim into a Bypass
Trust but never did so, no disclaimer was made. The Court
indicated that a key element of a valid disclaimer is the
identification of assets being disclaimed. Estate of
Chamberlin TC Memo 1991-181, Aff'd 87AFTR2d ¶ 2001-
987 (9th Circuit, 2001).
iii. In Private Letter Ruling 8412078, the Surviving Spouse was
allowed to disclaim a fraction of an outright bequest which
then fell into a Bypass Trust.
iv. The written Disclaimer must have been delivered to the
Trustee. Treasury Regulation 25.2518-2(b)(2).
v. For assets in a revocable trust which pass to a trust that the
Surviving spouse can revoke or amend, the nine (9) months
begin running at the first spouse to die's death. Treasury Regulation
25.2518-2(c)(5). Examples (1)-(4) and (6).
vi.In addition to a fractional disclaimer, a pecuniary (or dollar
amount) disclaimer is allowed. Treasury Regulation
vii. A formula disclaimer based on finally determined estate tax
values of the disclaimed assets does not violate public
policy. The Proctor case, where gift was to be returned if it
turned out that gift tax was payable, was distinguished.
Christiansen, 130 TC No. 1.
II. Goal of the Disclaimer Trust
A. To defer the decision on whether or not to create and fund the trust
that protects the amount that the first spouse to die can pass on
without estate taxes until the first spouse to die's death.
B. To allow the Surviving Spouse, at the first spouse to die's death, to
look at the size of the estate, the size of the Survivor's own
exemption equivalent and the Survivor's own life expectancy in
i. Whether or not to disclaim
ii. Whether or not to protect the first spouse to die's exemption
iii. Whether or not to restrict the Surviving Spouse
a. Irrevocable Trust
b. Limitations on what the Surviving Spouse can do
c. Duties to the remainder beneficiaries
d. 1041 annual Income Tax return requirement
C. To take advantage of the special rule only available to Surviving
Spouses, which allows the Surviving Spouse (if desired) the right to
benefit from the disclaimed property: income plus right to invade
principal under an ascertainable standard. Internal Revenue Code
§ 2518(b)(4) and Treasury Regulation 25.2518-2(a)(5).
D. A power of attorney specifically authorizing an attorney-in-fact to
disclaim on behalf of the Surviving Spouse may be executed. See
Probate Code § 4264.
i. This covers the situation in which the Surviving Spouse is
incapacitated at the death of the first spouse to die.
III. Problems of the Disclaimer Trust
A. Surviving Spouse fails to act within the nine (9) months and
inadvertently loses the ability to protect the first spouse to die's
B. Surviving Spouse cannot be given even a limited power of
appointment over the Trust which receives the Disclaimed assets.
Reg 25.2518-2(e)(5) Example 5.
C. Surviving Spouse loses the ability to disclaim if he or she accepts benefits of the property
during the nine (9) month period and before making the Disclaimer.
i. Examples of acceptance of benefits include acceptance by
Surviving Spouse of dividends, interest or rents from
property to be disclaimed. See Private Letter Ruling
8817061. But Surviving Spouse's residing in residence prior
to disclaimer was not considered to be an acceptance of
benefits. Private Letter Ruling 9135044 and Treasury
ii. Surviving Spouse's paying expenses of residence prior to
disclaimer was not considered to be an acceptance of
benefits. Private Letter Ruling 9135043
iii. Sale of an asset within the trust prior to the disclaimer was
not considered an acceptance. TAM 9509003.
a. But removal of the asset from the Trust and transfer
of it out to the Surviving Spouse would be an
acceptance by the Spouse.
iv. The Surviving Spouse by acting as Trustee is not deemed to
have accepted benefits unless the Trustee has the power to
direct payment of the disclaimed interests. Treasury
a. If Surviving Spouse has testamentary or intervivos
special power of appointment over Bypass Trust,
Disclaimer will not be qualified. Treasury Regulation
25.2518.2(e) Example 5
b. If Surviving Spouse as Trustee can invade Bypass
Trust for his or her health, education, support and
maintenance, Disclaimer will be qualified. Treasury
Regulation 25.2518-2(e) Example 6.
c. If Surviving Spouse has 5 & 5 power over Bypass
Trust, Disclaimer will be qualified. Treasury
Regulation 25.2518-2(e) Example 7.
Randy Spiro is a Beverly Hills attorney who is a certified specialist in Taxation and in Estate Planning, Probate and Trust Law. He holds a Masters Degree in Taxation from Golden Gate University and has taught tax and estate planning courses at UCLA and USC. He has been named as Super Lawyer by Los Angeles Magazine.
Access Randy Spiro's Martindale-Hubbell profile on www.martindale.com