Fifth Circuit rules disclaimer is qualified.

• Author: Barton, Peter C.
• Position: U.S. 5th Circuit Court of Appeals

In Estate of Monroe, 124 F3d 699 (1997), rev'g 104 TC 352 (1995), the Fifth Circuit ruled that a disclaimer is qualified (and therefore valid) for gift and estate tax purposes even if the disclaimant made the disclaimer in expectation of a future benefit. However, a disclaimer is not qualified if there is mutually bargained-for consideration that results in a promise or agreement that the disclaimant will receive a benefit for disclaiming.

Sec. 2518(a) specifies that, if a person makes a qualified disclaimer of an interest in property, the estate and gift tax laws apply as if the interest had not been transferred to such person. Sec. 2518(b) defines a qualified disclaimer as a written "irrevocable and unqualified refusal" to accept the interest. The disclaimant must "not have accepted the interest or any of its benefits." Regs. Sec. 25.2518-2(d)(1) adds that express or implied acceptance of the interest invalidates the disclaimer if made prior to disclaiming. Acceptance includes accepting dividends, interest or rent from the property or pledging it as security for a loan. Also, the acceptance of any consideration in return for disclaiming is acceptance of the benefits of the entire interest disclaimed.

In 1989, Louise Monroe (age 91) died, leaving a multimillion-dollar estate. Her husband, Edgar (age 92) was executor; Edgar's nephew, Robert, assisted in administering the estate. The Monroes had no children. Louise's will made 31 specific bequests to family members, long-time employees and friends; she also made three $500,000 bequests to two grandnieces and a grandnephew. Edgar was the residual beneficiary of Louise's estate.

The estate's accountants determined that the individual bequests would be substantially reduced by the applicable Federal estate tax. However, if the legatees disclaimed their bequests, the amounts disclaimed would pass to Edgar, and no estate tax would be assessed (due to the Sec. 2056(a) unlimited martial deduction). The accountants assured Edgar that he could independently make gifts and bequests to these legatees even if they disclaimer Louise's bequests. However, the accountants also pointed out that the legatees must not be promised anything in return for disclaiming.

Edgar asked five and Robert asked 24 of the legatees for disclaimers. After rehearsing with the accountants, Robert made the following points to the legatees: Edgar was upset about the taxes the legatees would have to pay; he would like them to...