State law disclaimers: always effective for federal tax purposes?

• Jurisdiction: United States
• Author: Moore, Philip E.
• Date: 01 October 2000

In recent years, beneficiaries have been filing disclaimers in efforts to avoid creditors, including IRS levies on estate proceeds. Under most state laws, disclaimers result in the bequest or inheritance passing to the person next in line to receive a share of the decedent's estate; creditors of the disclaiming heir may not reach the property.

Given this climate, beneficiaries owing back taxes have recently elected to disclaim bequests or inheritances with full knowledge that any assets received might be levied on and seized by the Service. By filing the election, these beneficiaries hoped that estate assets would pass free of IRS levies to another individual. Drye, S.Ct. (1999), addressed this issue. The taxpayer was insolvent at the time of his mother's death. Valid tax liens had been placed against all of his "property and rights to property" pursuant to the provisions of Sec. 6321. Initially appointed as administrator of his mother's estate, Drye resigned several months later. He was succeeded by his daughter, who served as administratrix of the estate and established a trust. The trust instrument provided that she and her parents would be the trust's beneficiaries. Further, the Dryes' legal counsel was named trustee and authorized to distribute trust funds for their health, maintenance and support. As a spendthrift trust, the entity was designed to shield corpus from creditors of the...