Use of disclaimers by U.S. persons in the international context.

• Author: Newton, William H., III
• Position: Tax Law

The extant concept of renunciation or disclaimer of an interest in property arose from the common law. It is predicated on the notion of a gift that requires acceptance of the property interest by the donee in order for the gift to be complete. Absent acceptance, a gift is necessarily incomplete with the donee correspondingly acquiring no interest in the subject property. So also, a donee or a trust beneficiary, though entitled to ownership of an interest in property, may nevertheless choose to renounce or disclaim that property interest.

The disclaimer may be particularly invaluable as an estate planning strategy, especially in the international context. To illustrate, a U.S. citizen or domiciliary on becoming a trust beneficiary may desire to disclaim the beneficial interest in the trust to avoid otherwise being potentially exposed to U.S. tax consequences in favor of a separate and distinct beneficiary, e.g., one who is a nonresident, nondomiciliary alien of the U.S.

A key consideration in this respect is for the beneficiary to be in a position to disclaim under the literal terms of the pertinent trust instrument when viewed in light of the applicable law. Though seemingly a facile proposition, this is not necessarily so, especially when considerations involving a trust governed by foreign (non-U.S.) law and the concept of a qualified disclaimer as defined under I.R.C. [section]2518 (1986) are both at issue. In such scenario, the preferable approach in addressing the potential utilization of a disclaimer is at the very outset in connection with drafting the trust instrument itself, instead of after the fact. Delay until the very point in time when utilization is desired may limit, if not preclude entirely, the use of a disclaimer.

[ILLUSTRATION OMITTED]

To illustrate, consider a trust governed by foreign legal principles that, as drafted, does not expressly address disclaimer considerations, but otherwise contains the following provision:

After the death of the Settlor, the Trust Fund shall be divided into two equal shares to be held for the benefit of the Child of the Settlor (the "Child") and the Grandchild of the Settlor (the "Grandchild"), respectively, who may from time to time by writing delivered to the Trustees demand all or any part of the income or capital of their respective shares, or, if one has predeceased the Settlor, the entire Trust Fund both as to income and capital shall be held for the benefit of the survivor, or if both the Child and the Grandchild predecease, then the Trust Fund shall be distributed outright to Charity A.

For this same purpose, further assume 1) the applicable governing law is that of a foreign jurisdiction, which as in the case of the Cayman Islands, is based on nonstatutory common law; 2) the settlor who has just passed away was the surviving...