Right to be free of estate tax liability may be disclaimed.

• Author: Lerman, Jerry L.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) introduced significant changes and great uncertainty to estate and gift taxes. It generally provides for a gradual phaseout and eventual repeal of the Federal estate tax over the next nine years, with a return to pre-EGTRRA estate tax law in year 2011.

Due to the EGTRRA's swiftly changing set of rules (and a genuine doubt as to whether its provisions will withstand the test of time), wealthy individuals may have a difficult time establishing an estate plan that will continue to accomplish its intended results. As a result, post-death disclaimers may be used more frequently to achieve desired outcomes. Such disclaimers allow willing beneficiaries to view the estate makeup after a decedent's death and to correct some (if not all) unintended results.

For tax purposes, a qualified disclaimer has the effect of treating the disclaimed interest as if it had never been transferred to the disclaimant. Thus, the disclaimed interest never becomes part of the disclaimant's gross estate, nor is he deemed to have made a gift to the person to whom the disclaimed interest passes.

Example: Decedent D's will leaves her entire estate to her husband H, if he survives. If not, it will be left to their son S. D did not use any of her lifetime estate exemption. On D's death, the value of her estate is $200,000. H survives her, but is independently wealthy and would rather the $200,000 go to S. H makes a qualified disclaimer of his bequest under the will and the estate property passes to S.

Because his disclaimer was qualified, H is not deemed to have made a gift to S for gift tax purposes. Additionally, the property would pass estate-tax free to S, because the property's value does not exceed D'S life-time estate exemption.

Under Sec. 2518(b), a qualified disclaimer must be (1) an irrevocable and unqualified refusal by the disclaimant to accept an interest in property, (2) made in writing and (3) made within nine months after the interest being disclaimed was created (i.e., when the decedent died); as a result of the disclaimer, the property must pass to the decedent's spouse or to someone other than the disclaimant without any direction by the disclaimant. Additionally, the disclaimant must not have accepted the interest or any of its benefits prior to disclaiming.

Recently, in Letter Ruling 200127007, the IRS had to consider whether estate beneficiaries could disclaim a benefit bequeathed to...