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Disclaimer Planning Disclaimer Planning Catherine Bright Haws Key Harrington Barnes, P.C. 3710 Rawlins, Suite 950 Dallas, Texas 75219-4469 (214) 884-4817 office (469) 235-2911 mobile (214) 615-7926 facsimile [email protected] Presented to: Collin County Probate Section June 10, 2016 Disclaimer Planning Overview I. Introduction. Disclaimers can This paper will attempt to address the be very powerful tools to accomplish a client's following questions: objectives, though it takes a client with unique 1. What is a disclaimer? planning goals for a disclaimer to be helpful. 2. How does disclaimed property pass? You might even say that a disclaimer is rarely, if 3. Who may disclaim and when is ever, helpful to a client at all in the sense that it court approval or notice required? deprives the client of assets, interests in property 4. What are the remedies for an or powers over property to which he or she was improper fiduciary disclaimer? otherwise entitled and gives the client nothing 5. What are the key legal requirements of value in exchange (no consideration may be of a disclaimer? given to a disclaimant in connection with his 6. What are some of the primary goals decision to disclaim). However, a disclaimer achieved by disclaimers? may nonetheless serve a client's other objectives This paper will also attempt to address these such as: the minimization of federal transfer additional questions at various points taxes, routing assets in a more desirable manner throughout the paper: How might disclaimer (from the disclaimant's perspective) within the provisions be incorporated into estate planning parameters of the estate plan or applicable law, documents to facilitate a client's goals? How the avoidance of certain (but not all) creditor might a disclaimer undermine a client's estate claims, and the prevention of exposure of other planning goals, and when should a disclaimer assets to liability risk associated with an power potentially be curtailed? How might a undesirable asset. disclaimer be used to accomplish the goals of a Disclaimers should be used with extreme client who is not the original owner of the caution and only after the estate planning assets? What ethical implications arise in the attorney has: (1) ensured that the client is well context of disclaimers? informed of the legal consequences and (2) performed key due diligence in connection with II. What is a Disclaimer? There a possible disclaimer, including determining are multiple meanings of a legal "disclaimer" with certainty who will receive the disclaimed but the topic of this paper is the disclaimer property, if the disclaimer is of an interest in (renunciation) of interests in or powers over property. property. Black's Law Dictionary (Free Online Further, if the contemplated disclaimer will Legal Dictionary, 2nd Ed.) defines a disclaimer be by a fiduciary acing in a fiduciary capacity, it as: would be advisable for the disclaimant to notify The disavowal, denial, or the beneficiaries of the intent to disclaim, to renunciation of an interest, right, explain the reasons for doing so and to request a or property imputed to a person release from any liability in connection with or alleged to be his. Also, the doing so, in addition to complying with the legal declaration, or the instrument, by requirements for disclaimer by a fiduciary, which such disclaimer is described further in this paper and in the Texas published…. The act by which a Uniform Disclaimer of Property Interests Act party refuses to accept an estate ("Disclaimer Act"), codified in Chapter 240, which has been conveyed to him. Texas Property Code, effective as of September State Law Meaning of Disclaimer Under the 1, 2015. Disclaimer Act and Applicable Provisions of the Texas Estates Code. Section 240.002(6) of the Disclaimer Planning – Page 2 Disclaimer Act provides that "[d]isclaimer" result of the death of another person in a manner means the refusal to accept an interest in or that corresponds closely to the definition of power over property. Section 240.002(2) "disclaim" but omits the reference to an interest elaborates on the meaning: the person would be entitled to under an "Disclaim" means to refuse to instrument creating a trust. Only one of the two accept an interest in or power definitions of "beneficiary" refers to property over property, including an the beneficiary is entitled to under the new interest or power the person is transfer on death deed. entitled to: (A) by inheritance; Disclaimer Under IRC 2518. Very (B) under a will; (C) by an commonly, especially prior to the enactment of agreement between spouses for the changes made in the 84th Legislature that community property with a right became effective on Sept. 1, 2015, the term of survivorship; (D) by a joint "disclaimer" was used in reference to a tenancy with a right of survivor- "qualified disclaimer" under Section 2518 of the ship; (E) by a survivorship agree- Internal Revenue Code ("IRC") and associated ment, account, or interest in Treasury Regulations. Although disclaimer which the interest of the decedent planning has been used to some degree for non- passes to a surviving beneficiary; tax reasons, tax-motivated disclaimers seem to (F) by an insurance, annuity, be far more prevalent than other disclaimers. endowment, employment, de- With fewer individuals being subject to federal ferred compensation, or other transfer taxes, tax-motivated disclaimers may contract or arrangement; (G) become less common. Some of the tax benefits under a pension, profit sharing, of a qualified disclaimer are discussed further thrift, stock bonus, life insurance, below in this paper. survivor income, incentive, or Assignment or Disclaimer? The other plan or program providing disclaimer provisions under Chapter 122 of the retirement, welfare, or fringe Estate's Code make it clear that "[a] person who benefits with respect to an is entitled to receive property or an interest in employee or a self-employed property from a decedent under a will, by individual; or (H) by an inheritance, or as a beneficiary under a life instrument creating a trust. insurance contract, and does not disclaim the Other relevant terms, such as "disclaimed property under Chapter 240, Property Code, interest" and "disclaimant," are also defined in may assign the property or interest in property Section 240.002. to any person." Sec. 122.201. It is perhaps Provisions relating to the disclaimer of unclear under Chapter 122 whether a disclaimer property that the disclaimant would entitled to that does not meet the requirements of the receive as a result of the death of another person Disclaimer Act is necessarily an assignment. can be found in Chapter 122 of the Texas However, the statute is clear that "[a]n Estates Code, entitled "Disclaimers and assignment under this subchapter is a gift to the Assignments." Chapter 122 contains two almost assignee and is not a disclaimer under Chapter identical definitions of the term "beneficiary" as 240, Property Code." Sec. 122.205. In other the result of two different bills with the same words, a beneficiary who fails to comply with effective date amending Section 122.001. Both the requirements of the Disclaimer Act has not amendments define the term to include a person made a disclaimer, may have assigned his who would have been entitled, if the person had property interest, and if he has assigned his not made a disclaimer, to receive property as a interest, he has made a gift. The treatment of a Disclaimer Planning – Page 3 non-conforming disclaimer as a gift would be restrict a power only partially (e.g., by consistent with the federal transfer tax treatment disclaiming a withdrawal right over a trust of a disclaimer that does not comply with the except to the extent the right can lapse pursuant requirements for a qualified disclaimer. to the "$5,000 by 5%" rule of IRC 2514(e)). Disclaimers Apply Not Only to Property The current statute includes a rule permitting a But Also to Powers. As is apparent from the surviving spouse to disclaim property passing to definition of the term "disclaimer," disclaimers the spouse in one form, while retaining other relate not only to specific interests in property interests that the spouse may have in the (such as the right to own a particular asset or a disclaimed property. "A disclaimer by a right to income or principal distributions under a decedent's surviving spouse of an interest in trust agreement) but also to powers (such as a property transferred as the result of the death of power of appointment, a withdrawal power, or the decedent is not a disclaimer by the surviving powers held by a trustee). An attorney who spouse of any other transfer from the decedent understands the legal and tax consequences of to or for the benefit of the surviving spouse, powers over property and how to use regardless of whether the interest that would disclaimers to negate unintentional have passed under the disclaimed transfer passes consequences can in some cases make important because of the disclaimer to or for the benefit of corrections to an estate plan after the estate plan the surviving spouse by the other transfer." Sec. can no longer be changed by the client. For 240.058. This rule comports with the spousal example, a disclaimer of a power as trustee to disclaimer exception under IRC Sec. 2518. make distributions in excess of a health, maintenance, support and education standard, III. How does disclaimed property which power would inadvertently cause pass? An important rule to remember is that inclusion of the trust property in the trustee's disclaimed property passes without any taxable estate or result in taxable gifts in certain direction from the disclaimant.
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