Thanks, but No Thanks: Making Qualified Disclaimers on Behalf of Minors

• Citation: Vol. 23 No. 4
• Publication year: 2010

Georgia State University Law Review

Volume 23 , ,

Article 5

Issue 4 Summer 2007

6-1-2007

Thanks, But No Thanks: Making Qualified Disclaimers on Behalf of Minors

Millie Baumbusch

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Recommended Citation

Baumbusch, Millie (2006) "Thanks, But No Thanks: Making Qualified Disclaimers on Behalf of Minors," Georgia State University Law Review: Vol. 23: Iss. 4, Article 5.

Available at: http://digitalarchive.gsu.edu/gsulr/vol23/iss4/5

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THANKS, BUT NO THANKS: MAKING QUALIFIED DISCLAIMERS ON BEHALF OF MINORS

Introduction

According to Miss Manners, the correct response upon receiving a gift is to express a sincere thank you, preferably in a note handwritten on fine stationery.¹ Under certain circumstances, however, even Miss Manners acknowledges that it is appropriate to refuse a gift. If the gift at issue is a transfer of an interest in property, federal and state transfer tax laws are structured so that it may be wise for a beneficiary to decline the gift by means of a qualified disclaimer.³ Perhaps the beneficiary wants to reduce overall tax liability for himself and his family or simply wants to avoid waiting creditors.⁴ Perhaps the beneficiary will use disclaimer as a means of "postmortem" estate planning, to adapt the estate plan to changed family circumstances or to compensate for a drafting error in the will.⁵ The motivation of a particular disclaimant may not be financial: a person anticipating a divorce, for example, may lawfully disclaim any bequest in order to frustrate the expectations of the soon to be ex-spouse.⁶

The common law has long recognized that an almost infinite variety of consequences can evolve from a gratuitous transfer of property, and thus the common law allowed persons to disclaim gifts or inheritances. Courts generally do not consider motivation a

1. Judith Martin, Miss Manners' Guide to Excruciatingly Correct Behavior 374 (1982).

2. Hat 526.

3. See generally Joan B. Ellsworth, On Disclaimers: Let's Renounce I.R.C. Section 2518, 38 VlLL. L. REV. 693 (1993) (discussing the law regarding disclaimers). Disclaimer is also called renunciation; the two terms are used interchangeably. Id. at 698.

4. Andrew S. Bender, Disclaimer Law: A Call for Statutory Reform, 2001 U. ILL. L. REV. 887, 894 (2001).

5. Ellsworth, supra note 3, at 709-12.

6. Mat 703.

7. See Adam J. Hirsch, Revisions in Need of Revising: The Uniform Disclaimer of Property Interests Act, 29 Fla. St. U. L. Rev. 109, 112-13 (2001) [hereinafter Revisions].

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relevant factor in their considerations of valid disclaimers when those

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disclaimers are made by the disclaimants themselves.

When courts review the requests of guardians ad litem, fiduciaries, or trustees to disclaim for those who cannot act for themselves, however, motivation can become an important consideration.⁹ Disclaimers on behalf of minors require special scrutiny for two reasons: first, a minor is legally incapable of acting on his own behalf, and second, a minor has the ability to disaffirm actions taken on his behalf during his minority after he reaches the age of maj ority.¹⁰ There is considerable disagreement as to when a representative should be permitted to disclaim on behalf of a minor.¹¹ Fiduciaries are charged with acting in the best interests of their clients, but the best interests of minors are not always easy to discern.¹² Currently, statutes and case law controlling disclaimers on behalf of minors present a confusing amalgam of differing, and sometimes competing, provisions.¹³ Attorneys and others who act as guardians and fiduciaries are rightly concerned about how to ensure that they make effective disclaimers on behalf of their wards or beneficiaries.¹⁴ This Note examines those issues.¹⁵

Part I of this Note reviews the history of disclaimers and the policy considerations involved in allowing minors to disclaim.¹⁶ Part II considers the law of disclaimers, with particular attention to how

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federal statutes, state statutes, and uniform laws interact. Part III examines federal and state cases in which fiduciaries attempted to execute disclaimers on behalf of minors and incompetent adults and compares cases in which such disclaimers were permitted with cases

8. Bender, supra note 4, at 889.

9. See Ellsworth, supra note 3, at 714.

10. SeeWLC. §2518(2005).

11. See Ellsworth, supra note 3, at 704.

12. See id. at 704-05.

13. See id.

14. See id. at 714.

15. See infra Parts II-IV.

16. See infra Part I.

17. See infra Part II.

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in which such disclaimers were disallowed. Part IV proposes treating disclaimers by minors in a fashion similar to treatment of disclaimers by surviving spouses, by which the surviving spouse can, under particular circumstances, execute a qualified disclaimer while enjoying the benefit of the disclaimed property.¹⁹

I. Overview of the Issue

A, A Brief History of Disclaimer

1. Disclaimer Defined

A disclaimer is the refusal by a beneficiary to accept an interest in property that has been gratuitously transferred to him, either through an inter vivos gift, a will, an intestate succession, or another transfer.²⁰ The concept of disclaimer rests on two basic principles of property law: "(1) ^a gratuitous transfer is not complete until its acceptance by the recipient, and (2) no person can be forced to accept

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property against his will."

2. Who May Disclaim?

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Devisees and heirs may disclaim for themselves. Under most disclaimer statutes, the representative of a protected person, such as a minor or an incompetent adult, is authorized to make a disclaimer for such a person.²³ Representatives of a deceased person may also disclaim.²⁴ Some states specifically allow disclaimers to be made by a guardian acting on behalf of an unborn person.²⁵

18. See infra Part III.

19. See infra Part IV.

20. Bender, supra note 4, at 889.

21. Ellsworth, supra note 3, at 694.

22. Revisions, supra note 7, at 131.

23. Ellsworth, supra note 3, at 714; see, e.g., I.R.C. § 2518(b)(2) (2005) (a "legal representative" may disclaim); O.C.G.A. § 53-l-20(b) (2005) ("fiduciaries acting on behalf of an individual" may renounce).

24. Revisions, supra note 7, at 138.

25. See, e.g., Mont. Code Ann. § 72-2-811(1 )(c) (2005); Tex. Prob. Code § 37(A) (2005); Minn. Stat. §524.5-411(f)(2004).

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While guardians ad litem, conservators, and other fiduciaries are generally allowed to make disclaimers for minors and incompetents, the preponderance of statutory and case law denies trustees the power to make disclaimers on behalf of trust beneficiaries.

The Internal Revenue Service has stated, "Under the law of most jurisdictions, a trustee cannot make a unilateral disclaimer of a fiduciary power that affects the rights of a beneficiary unless the trust instrument expressly authorizes such a disclaimer or the affected beneficiary consents to the disclaimer." Thus, in the absence of specific trust language allowing the trustee to disclaim, only persons with a beneficial interest in trust property can execute a qualified disclaimer of such property. This is analogous to the well-established notion that a trustee may not give gifts from trust property unless such action is specifically allowed by the trust instrument or the trustee has the consent of the trust beneficiary. The I.R.S. gift tax regulations state that "[a] transfer by a trustee of trust property in which he has no beneficial interest does not constitute a gift by the trustee."³⁰

In one case, McClintock v. Scahill, a court allowed a trustee to renounce proffered interests in property. The Massachusetts Supreme Judicial Court permitted a trustee to disclaim a distribution of $415,664 from the estate of a grandfather to a trust created by him and his wife for their grandchildren. The court allowed the trustee of the grandchildren's trust to reject a distribution to the trust because the disclaimer would result in estate tax savings of $625,000.³³ The court accepted the rationale of the trustee, who "believed" that, in the long run, those savings would redound to the grandchildren's benefit, because the grandmother was still alive and was funding the

26. See Ellsworth, supra note 3, at 704.

27. Rev. Rul. 90-110, 1990-110 I.R.B. 18.

28. Id; Ellsworth, supra note 3, at 704.

29. Ellsworth, supra note 3, at 704.

30. 26 C.F.R. § 25.2511-1 (g)(1) (2005).

31. Ellsworth, supra note 3, at 714 (discussing McClintock v. Scahill, 530 N.E.2d 164 (Mass. 1988)).

32. McClintock v. Scahill, 530 N.E.2d 164, 165 n.2, 166 (Mass. 1988).

33. Id at 165 n.2, 166.

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grandchildren's trust, which had been an important goal of the couple's financial planning.³⁴ This holding—that a trustee may disclaim on behalf of the beneficiary of a trust—is unusual.³⁵

Some state statutes specifically prohibit a trustee from disclaiming. This type of prohibition arose in Estate of Horowitz, when the court briefly addressed the issue of funds passing to a trust for the benefit of the child.³⁷ The court noted the controlling New Jersey statutory prohibition on disclaimers by trustees, which defined a "devisee" who may disclaim as "any person designated in a will to receive a devise but does not mean a trustee or trust designated in a will to receive a devise" The court reasoned that even if the disclaimer in question were authorized by a court in another jurisdiction, it would have been ineffective for New Jersey tax

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purposes. If a disclaimer does not meet state provisions, it is also...