Outline of the Details of a Disclaimer Trust

Outline of the Details of a Disclaimer Trust

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

                        28.2518-3(c).

                        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

            determining:

                                    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

            exemption equivalent.

 

            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

                        Regulation 25.2518-2(d)(l)

                        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

                        Regulation 25.2518-2(d)(2).

                                    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.

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