IRS has privately ruled that a wife's disclaimer of her husband's retirement benefits (including benefits that would have been payable under a disclaimer trust set up by his will), effected by her daughter as administratrix of her estate, was a qualified disclaimer under Code Sec. 2518 of those benefits that were not yet accepted. As a result, the disclaimed benefits passed outright to the couple's children.
Background. A qualified disclaimer (an irrevocable and unqualified refusal to accept ownership, made in writing by a specified deadline) with respect to any interest in property has the effect of treating that interest, for gift (and estate and generation-skipping transfer) tax purposes as if it had never been transferred to the disclaimant. (Code Sec. 2518) And the disclaimant isn't treated as having made a gift to the person to whom the interest passes by reason of the disclaimer. (Reg. §25.2518-1(b))
As noted, one requirement for qualified disclaimer treatment is that the disclaimant must not have accepted the property or any of its benefits. (Code Sec. 2518(b)(3)) Acceptance is manifested by an affirmative act which is consistent with ownership of the interest in property. Acts indicative of acceptance include using the property or the interest in property; accepting dividends, interest, or rents from the property; and directing others to act with respect to the property or interest in the property. (Reg. §25.2518-2(d)(1))
Rev Rul 2005-36, 2005-1 CB 1368, provides that, for qualified disclaimer purposes, a beneficiary's receipt of required minimum distributions (RMDs) from an IRA constitutes acceptance of that portion of the corpus of such account, plus the income attributable to that amount. The beneficiary's acceptance, however, of these amounts does not preclude the beneficiary from making a qualified disclaimer with respect to all or a portion of the balance of the IRA.
Facts. On Date 1, an individual whom we'll call Donald died with a will survived by his wife, Sally, and their three children. At death, Donald held several investments in various Retirement Accounts, including a traditional IRA and two Code Sec. 403(b) accounts at Brokerage Firm 1, and a Code Sec. 403(b) account at Brokerage Firm 2.
The beneficiary designation forms for the Retirement Accounts listed Sally as the primary beneficiary. If she survived Donald and disclaimed her interests in Retirement Accounts, the trustee of the trust created under Donald's will was designated as the contingent beneficiary.
Under his will, if she survived him, any Retirement Accounts that name the trustee as beneficiary are to fund a disclaimer trust established under the will. However, if Sally does not survive Donald, then any Retirement Accounts are to pass outright, equally to their children.
Under the disclaimer trust's terms, the trustee must distribute all income to Sally during her lifetime and also may make discretionary distributions of principal to her. Sally also has the right to withdraw up to an undisclosed percentage of the principal each year.
As of his date of death, Donald was receiving RMDs from Retirement Accounts. Both Brokerage Firms distributed the RMDs quarterly by automatic deposit into Bank Account 1, which was held jointly in the names of Donald and Sally with rights of survivorship.
Sally died after Donald on Date 3. On Dates 2 and 5, Brokerage Firm 2 automatically deposited RMDs into Bank Account 1. On Date 4, Brokerage Firm 1 automatically deposited an RMD into Bank Account 1.
Subsequently. Court appointed Daughter as Administratrix of Sally's estate. Shortly thereafter, Daughter closed Bank Account 1 and transferred the entire balance into Bank Account 2, which she opened for Sally's estate.
Daughter, as Administratrix, then petitioned Court for authorization to renounce Sally's entire interest in the IRA and one of the Code Sec. 403(b) accounts, as well as her entire interest attributable to one investment in the other Code Sec. 403(b) account at Brokerage Firm 1. She also requested authorization to disclaim Sally's entire interest in the Code Sec. 403(b) account at Brokerage Firm 2, as well as Sally's interest in the disclaimer trust established under Donald's will.
Court granted Daughter's petition, and she notified, in writing, Brokerage Firms 1 and 2 and Donald's estate that Sally was disclaiming these interests. Under applicable state law, a disclaimant is treated as having predeceased the decedent.
The proceeds from the RMDs remained in Bank Account 1 and, subsequently, Bank Account 2, from the date of distribution to the date of the disclaimer. Sally's estate will accept a distribution from Brokerage Firms 1 and 2 representing the income attributable to the RMDs earned between the Donald's death and the date of the disclaimer. No other amounts were distributed to Sally or her estate from Retirement Accounts.
Ruling sought. Daughter wanted a ruling that the automatic deposits of RMDs into Bank Account 1 and the transfer of the entire balance of Bank Account 1 into Bank Account 2 didn't constitute an acceptance by Sally of any portion of Donald's Retirement Accounts under Code Sec. 2518(b)(3) and Reg. §25.2518-2(d).
IRS treats a portion as accepted by Sally. Although the RMDs were automatically deposited into Bank Account 1 and such amounts remained in Bank Accounts 1 and 2 from the date of distribution until the date of the disclaimer, IRS said Sally was deemed to have accepted the RMDs under Code Sec. 2518(b)(3) and Reg. §25.2518-2(d).
In addition, IRS noted that Rev Rul 2005-36 provides that a beneficiary's receipt of an RMD constitutes acceptance of both the RMD and the income attributable to that amount. The amount of income attributable to the RMDs for each account is calculated by dividing the total amount of RMDs Sally received from that account by the total value of that account on Decedent's date of death and multiplying the result by the total amount of income earned in that account between the Decedent's date of death and the date of the disclaimer. Accordingly, Sally may not make a qualified disclaimer of the RMDs or of the income attributable to that amount.
Qualified disclaimer of balance. IRS concluded, however, that Sally could make a qualified disclaimer of the balance of the Retirement Accounts if the requirements of Code Sec. 2518 were met. IRS observed that Daughter received a court order granting her petition to disclaim Sally's interests in Retirement Accounts and the disclaimer trust established under Donald's will. Daughter, as Administratrix, then disclaimed those interests in writing and represented to IRS that Sally did not receive any additional distributions from Retirement Accounts. Based on these facts and representations, IRS concluded that Sally's disclaimer of the balance of Retirement Accounts satisfied the requirements for making a qualified disclaimer.
Observation: While qualified disclaimer treatment was not obtained for the entire benefits as sought, it was achieved for a portion of them, which presumably was sizeable.
References: For qualified disclaimers, see Federal Tax Coordinator 2d ¶Q-2352; United States Tax Reporter Estate & Gift ¶25,184; TaxDesk ¶713,012; TG ¶40087.