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IRS Rules Proposed Disclaimers of Gifts from Deceased Wife were Qualified Disclaimers.

(Parker Tax Publishing May 3, 2015)

The IRS ruled that a taxpayer's proposed disclaimers of securities gifted to him by his wife before her death were qualified disclaimers, resulting in certain gifts being treated as if they had never been made. PLR 201516056.

Background

The taxpayer's wife maintained two accounts, each with publicly-traded stocks and other assets. She gratuitously transferred all of the assets in her first account to her husband's account, and added her husband as a joint owner with right of survivorship to her second account. After the wife made these transfers, the husband made cash withdrawals and transacted sales and purchases of securities in his account, and in his wife's second account. Subsequently, he transferred all of the assets, except one security, in his wife's second account to a second account of his own. A few months later, the wife died, leaving the husband as the executor of her estate.

After his wife's death, the taxpayer intended to disclaim his interests in the gifts. He stated he would, within nine months of the gift of the assets in the first account, execute a written, dated document that identified specific securities in his first account, acknowledged his receipt of those securities, and stated his irrevocable and unqualified refusal to accept the specific securities, noting that he would not include any security that was purchased or sold prior to the execution of the disclaimer. The taxpayer also intended to execute a similar document within nine months of his wife's death disclaiming his interests in the assets he had transferred from his wife's second account. In addition, he intended to establish two brokerage accounts on behalf of his wife's estate to which the disclaimed assets would be transferred.

The taxpayer requested a ruling that the two disclaimers would be qualified disclaimers for purposes of Code Sec. 2518.

Analysis

A donee's refusal to accept a gift is called a disclaimer. If a person makes a qualified disclaimer, then for purposes of estate and gift taxes, the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer (Code Sec. 2518(a)). For a disclaimer to be a qualified disclaimer:

(1) the donee's refusal to accept the gift must be in writing;

(2) the refusal must be received by the donor, the legal representative of the donor, the holder of the legal title to the property to which the interest relates, or the person in possession of the property within nine months after the transfer creating the interest is made;

(3) the disclaimant must not have accepted the interest or any of its benefits; and

(4) as a result of the refusal, the interest must pass without any direction from the disclaimant to either the spouse of the decedent or a person other than the disclaimant (Code Sec. 2518(b)).

Reg. Sec. 25.2518-3(a)(1)(i) provides that the disclaimer of all or an undivided portion of any separate interest in property may be a qualified disclaimer even if the disclaimant has another interest in the same property. Reg. Sec. 25.2518-3(a)(1)(ii) provides that a disclaimant may disclaim a portion of an interest in severable property if the disclaimer would be a qualified disclaimer if that portion were the only property in which the disclaimant had an interest. Severable property is property which can be divided into separate parts each of which, after severance, maintains a complete and independent existence. For example, a donee of shares of corporate stock may accept some shares of the stock and make a qualified disclaimer of the remaining shares.

The IRS ruled the husband's proposed disclaimers satisfied the requirements of Code Sec. 2518(b). The taxpayer represented that within nine months following each of the completed gifts, in order to implement the two proposed disclaimers, the husband would: (1) execute a written document that identifies specific securities, acknowledges his receipt of those securities, and states his irrevocable and unqualified refusal to accept those securities, and (2) transfer from his accounts to separate estate accounts the identified specific securities and all of the income earned on these securities from the time the gifts were complete through the date he executed the disclaimers and transferred the securities.

The taxpayer also represented that the assets identified in his proposed disclaimers would be only securities that were not purchased or sold from the date the gifts were complete through the effective date of the disclaimers, along with all of the income earned on the securities during that period. The IRS ruled that under Reg. Sec. 25.2518-2(d)(1), the husband was not treated as accepting the securities identified in the disclaimers even though he directed the purchase and sale of certain other securities transferred to his accounts prior to the effective date of the proposed disclaimers. Since the securities were severable assets, the IRS ruled the husband could make a qualified disclaimer with respect to certain securities, while accepting the benefit of other securities in the account, pursuant to Reg. Sec. 25.2518-3(a)(1)(ii).

Additionally, under relevant state law, the securities identified in the proposed disclaimers were to pass under the residuary clause of the wife's will to a trust. Consequently, the IRS concluded the disclaimed property would pass to the beneficiaries of the trust without any direction by husband, as required by Code Sec. 2518(b).

Accordingly, the IRS ruled that the taxpayer's proposed disclaimers of the identified portions of the assets transferred to him by his wife were qualified disclaimers.

For a discussion of disclaimers relating to gifts, see Parker Tax ¶ 222,100. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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