Academic journal article Journal of Accountancy

The Importance of a Valid Disclaimer: Failure to Execute a Disclaimer Can Be a Costly Mistake

Academic journal article Journal of Accountancy

The Importance of a Valid Disclaimer: Failure to Execute a Disclaimer Can Be a Costly Mistake

Article excerpt

While estate planning normally occurs during life, it also can occur after a taxpayer's death. In letter ruling (technical advice memorandum) 200437032, the IRS ruled that a bequest to a member of a religious order who had taken a vow of poverty did not qualify for the estate tax charitable deduction under IRC section 2055. CPAs should take note of this ruling--it illustrates how the failure to execute a disclaimer can be an expensive mistake.

FACTS

The decedent's sister, a member of a Roman Catholic religious order, had taken a perpetual vow of poverty that effectively turned over all of the assets she might thereafter own to the order.

The decedent's will left his entire estate to his sister. Had she predeceased him, the order would have received the bequest. Instead, more than nine months after the decedent's death, his sister transferred all of the assets to the order but did not execute a disclaimer. Had she done so, the assets would have passed directly to the order--as if the sister had never been bequeathed them--and qualified for an estate tax charitable deduction.

ARGUMENTS

The estate raised a number of arguments, as follows--all of which the IRS rejected:

* The vow of poverty qualified as a disclaimer under IRC section 2518(a). The IRS said that, because the vow was not made in accordance with state law, it did not qualify as a disclaimer.

* The vow and subsequent transfer of assets to the order constituted a valid disclaimer under section 2518(c)(3), which requires a written transfer and passing of the assets to the party that would have received them had a valid disclaimer been executed. …

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