Our clients look to us to help them make informed and sound decisions. However, a good decision today is not necessarily a good decision a few years down the road. This is especially true in estate planning, where changing personal and financial circumstances dramatically affect the plan. The ultimate irrevocable act, death, can make these decisions final.
However, disclaimers offer lawyers a unique opportunity to rewrite an estate plan after the client’s death, and correct possible drafting errors and omissions. Moreover, documents drafted to anticipate possible disclaimers can provide even the most recalcitrant clients with the flexibility and comfort necessary for them to implement an estate plan.
Following are answers to common questions about disclaimers and their utility in pre- and post-mortem planning.
1. What is a disclaimer? A disclaimer is a refusal to accept an interest in property.
2. Is a disclaimer a state or federal law concept? Both. New Jersey law prescribes the circumstance under which a transferee may disclaim an interest in property, and the manner in which the disclaimed property devolves. The applicable statutes are N.J.S.A. secs. 3B:9-1 through 3B:9-13, and 46:2E-1 through 46:2E-13. Under federal law, a disclaimer is a creature of the federal Estate, Gift and Generation Skipping Transfer Tax. Disclaimers are addressed at Section 2518 of the Internal Revenue Code, and the Treasury Regulations promulgated thereunder at sec. 25.2518, et seq.
New Jersey Law
3. What does New Jersey law require in order to have a valid disclaimer? new Jersey law prescribes two separate, but similar, sets of requirements for disclaimers of “testamentary transfers” (i.e., property passing by will or intestate succession) and “non-testamentary transfers” (i.e., property passing outside of the provisions of the decedent’s will or via intestate succession). N.J.S.A. 3B:9-3 sets forth the following requirements that must be satisfied in order to have a valid disclaimer of a testamentary transfer or of an interest in an intestate estate: (1) it must be in writing, signed and acknowledged by the disclaimant (i.e., the person disclaiming); (2) it must describe the property or interest disclaimed; and (3) it must declare the disclaimer and the extent thereof.
N.J.S.A. 46:2E-4 prescribes similar requirements for “non-testamentary transfers.” Possible disclaimant under this category would include:
• the donee of an inter-vivos gift;
• surviving joint tenants, or surviving tenants-by-the-entirety;
• a surviving party to a joint deposit account or P.O.D. account;
• a person succeeding to a disclaimed interest;
• an appointee under a power of appointment exercised by a nontestamentary instrument; or
• a beneficiary of an insurance policy, annuity or Qualified Plan/IRA.
4. Does New Jersey law require that a disclaimer be filed in order to be effective? Yes. The filing deadline is generally nine months from the date of the transfer giving rise to the disclaimer. When the nine-month period begins to run depends on whether the disclaimer is of a present or future interest. As to testamentary transfers, a disclaimer of a present interest must be filed within nine months of the death of the decedent. A disclaimer of a future interest must be filed within nine months after the happening of the event that determines the taker’s right to possession, use or enjoyment of the property or interest.
As to nontestamentary transfers, a disclaimer of a present interest must be filed within nine months after the effective date of the nontestamentary instrument.
Examples of the “effective date” include the death of the insured under an insurance policy of which the disclaimant is the beneficiary, or the death of an IRA owner where the disclaimant is the named beneficiary of that account. If the transferee is under 18 years of age at that time, the nine-month period begins to run on his or her attaining that age.
Disclaimers of future interests must be made within nine months after the event determining that the taker of the property or interest is finally ascertained and his or her interest is indefeasibly vested. As is the case with present interests, the nine-month period is tolled until the disclaimant attains 18 years of age.
Note, however, that for both testamentary and nontestamentary transfers, the nine-month filing period may be extended by the court for reasonable cause.
Disclaimers of testamentary transfers must be filed with the office of the surrogate or Superior Court in which the estate administration has been commenced. A copy must also be hand-delivered or mailed (via certified or registered mail) to the estate’s personal representative or other fiduciary. Disclaimers of nontestamentary transfers need only be delivered or mailed (via certified or registered mail) to the person having legal title to, or possession of, the property or interest being disclaimed.
Where there is a disclaimer of an interest in real property, a copy of the disclaimer must be filed with the county clerk for the county in which the property is located.
5. May a disclaimer be made on behalf of a decedent, minor or mentally incompetent person? Yes, provided that the personal representative or guardian obtains approval from the court having jurisdiction of the decedent’s estate.
6. What is the effect of a valid disclaimer under New Jersey law? An individual who disclaims an interest in property is treated as predeceasing the transferor. For testamentary transfers of present interests, this means that the disclaimant is treated as predeceasing the decedent. For nontestamentary transfers, the decedent is treated as dying before the effective date of the applicable instrument or contact. With respect to future interests, the disclaimant is treated as failing to survive the event determining the taker of the property. In all events, a disclaimer relates back to the death of the decedent, or other event giving rise to the transfer.
Individuals may prescribe the manner in which disclaimed property passes. For example, a father may make a provision in his will for his son, but, knowing that his son has amassed significant assets of his own, provide that in the vent the son disclaims, the property passes to the son’s children (i.e., the father’s grandchildren’ see also, Question 20 below). Similar provisions could also be made in nontestamentary instruments, such as beneficiary designations for life insurance, IRAs and qualified plan benefits. Accordingly, as discussed in more detail below, lawyers should address the possibility of disclaimers with clients in pre-mortem, as well as post-mortem, planning.
7. When is the right to disclaim barred under New Jersey law? Aside from circumstance in which creditors’ rights may be affected, which are discussed in Question 8 below, the right of a person to disclaim property is barred if, before the expiration of the period in which he or she is entitled to disclaim (see Question 4 above), the person either (1) accepts or exercises control as beneficial owner over all or any part of the property; (2) voluntarily transfers or encumbers or contracts to transfer or encumber all or any part of the property; or (3) executes a written waiver of the right to disclaim. These prohibitions closely rack impediments to a “qualified disclaimer” under the Internal Revenue Code, discussed in Question 9 below.
8. May a disclaimer be used to avoid existing creditors? No, where the property to be disclaimed is levied under judicial process, or the disclaimer would be in fraud of the disclaimant creditors under the Uniform Fraudulent Transfer Act.
9. What requirements must be met in order to have a “qualified disclaimer” for federal Estate, Gift and Generation Skipping Transfer Tax purposes? Sec. 2518 of the Internal Revenue Code provides that the term “qualified disclaimer” means an irrevocable and unqualified refusal to accept an interest in property, but only if: (1) such refusal is in writing; (2) such writing is received by the transferor of the interest, his legal representative, or the holder of the legal title to the property to which the interest relates, no later than the date which is nine months after the later of (A) the day on which the transfer created in such person is made, or (B) the day on which such person attains age 21; (3) such person has not accepted the interest or any of its benefits; and (4) as a result of such refusal, the interest passes without any direction on the part of the disclaimant, and passes to (A) the spouse of the decedent, or (B) to a person other than the disclaimant.
While the Internal Revenue Code and New Jersey requirements are similar, they are not identical. For example, the code does not impose a filing requirement; the statute simple provides that the disclaimer must be “received” within the applicable nine-month period. Moreover, the code provides for a suspension of the nine-month period during the period of time that the disclaimant is under 21 years of age. Conversely, there is no suspension of the nine-month period for testamentary transfers, and with respect to nontestamentary transfers, only until the disclaimant reaches 18 years of age. This inconsistency in the federal and New Jersey rules begs Question 10 below.
10. Can there be a “qualified disclaimer” for federal Estate, Gift and Generation Skipping Transfer Tax purposes which is not a valid disclaimer under New Jersey law? Yes, with respect to transfers occurring after 1981. Under the so-called putative disclaimer rules of I.R.C. Sec. 2518(c)(3), a disclaimer which fails to qualify under local law may nevertheless be a “qualified disclaimer” for federal Estate, Gift and Generation Skipping Transfer Tax purposes if the following requirements are met: (1) a written transfer of the transferor’s (i.e., the disclaimant) entire interest in the property is made to the persons who would receive property in the event of a qualified disclaimer (emphasis added); (2) such transfer is made within the requisite nine-month period; and (3) the transferor has not accepted any of the benefits of the property to be disclaimed.
The putative disclaimer rules do not, however, render the New Jersey statutory provisions addressed in Questions 1 through 9 above irrelevant. Federal law will still look to New Jersey law to determine whether a valid “written transfer” has occurred. For example, a transfer of property by a personal representative, guardian or conservator without court approval would not be a valid written transfer under New Jersey law (see Question 5). Accordingly, the putative disclaimer rules would not apply to that transfer.
Similarly, a valid written transfer would not occur if the property was the subject of a levy under judicial process, or the disclaimer would be in fraud of the disclaimant creditors under the Uniform Fraudulent Transfer Act (see Question 8 above). Note, however, that the fact the disclaimer may be “voidable” has no effect on the determination as to whether a disclaimer is qualified; a disclaimer must be wholly void or voided by creditors in order for it not ti be qualified (Treasury Reg. Sec. 25.2518-1(c)(2)).
It is also local law that determines the identity of the taker of the disclaimed interest in the absence of a direction in the instrument creating the transfer; federal law plays no part in that determination.
Note also that the putative disclaimer rules contain a significant restriction in that the written transfer must be of the disclaimant entire interest . Both the Internal Revenue Code, sec. 2518(c)(1), and New Jersey law N.J.S.A. 3B:9-2 and 46:2E-2, permit a disclaimer of less than the disclaimant entire interest. A disclaimer that is valid under local law would, therefore, appear to preserve the disclaimant ability to disclaim less than his or her entire interest in the subject property.
Moreover, no reference is made in the putative disclaimer rules to the disclaimer of powers (see Question 14 below).
It would appear that a common scenario in which a putative disclaimant might want to invoke the putative disclaimer rules is where an otherwise valid disclaimer was not filed with the surrogate within nine months, either inadvertently or due to lack of awareness of the filing requirement. However, by the time it is discovered that the nine-month filing deadline has passed, the nine-month period for having made an effective “written transfer” may also have passed.
There is apparently no guidance from the Treasury Department or the courts as to what constitutes a “written transfer” for these purposes. Therefore, it is uncertain as to whether the disclaimer itself would qualify.
Finally, the nine-month filing requirement must be satisfied in order for a disclaimer to be effective for New Jersey Inheritance Tax purposes. N.J.A.C. 18:26-2.12.
11. What is the effect under federal law of a qualified disclaimer? If a person makes a qualified disclaimer of an interest in property, the federal Estate, Gift and Generation Skipping Tax provisions will apply to that interest as if it had never been transferred to the disclaimant. Consider the implications of this provision in light of the following scenario: Client is a 75-year-old widow with assets worth approximately $1.5 million. She is actively engaged in an annual gift-giving program involving her three children. The client’s sister dies, leaving the client $1 million (net of federal and New Jersey transfer taxes). If the client does not disclaim the inheritance, she will have assets of $2.5 million.
Her sister’s will provides that if the client predeceases her, the property otherwise passing to her will pass in equal shares to the client’s children. By disclaiming the inheritance, the client is treated under New Jersey law as having predeceased her sister (see Question 6). Accordingly, pursuant to the provisions of the will, the property will pass to the client’s children. For federal Estate, Gift and Generation Skipping Transfer Tax purposes, the client is treated as never having received the $1 million inheritance. Therefore, it passes to the next generation (i.e., her children) without any federal estate or gift tax consequence, i.e., (1) the $10,000 per donee gift limitation would not apply, and (2) no portion of the client’s unified credit against estate and gift tax would be absorbed.
However, the disclaimer would not avoid the New Jersey Inheritance Tax – Client’s children (i.e., the sister’s nieces and nephews) would be considered “Class D” beneficiaries, for Inheritance Tax purposes, this subjecting those transfers to tax. moreover, the $25,000 Inheritance Tax exemption, otherwise available for transfers to a sibling (a “Class C” beneficiary) would be lost.
12. When does the nine-month period commence? For individuals over the age of 21, the nine-month period commences on the date of the transfer creating the interest that is the subject of disclaimer. For inter-vivos transfers, the transfer creating an interest occurs when there is a completed gift for federal gift tax purposes, regardless of whether a gift tax is imposed. For transfers occurring at death, or which become irrevocable at death, the transfer creating an interest occurs as of the date of the decedent’s death, even if no estate tax is imposed against the decedent’s estate (Treas. Reg. Sec. 25.2518-2(c)(3)). Thus, if the client is the remainder beneficiary of a trust established under her aunt’s will five years earlier, she cannot execute a qualified disclaimer of her remainder interest in the trust; the nine-month period would have expired nine months after the aunt’s death.
13. Can a power be disclaimed? Yes, federal law (I.R.C. Sec. 2518(c)(2)) and New Jersey law (N.J.S.A. 3B:9-2 and 46:2E-2) both provide that a power may be disclaimed.
14. How can disclaimers be implemented to utilize the estate tax applicable exclusion amount of the first spouse to die? Consider the following scenario: Mom and Dad have assets worth $1.3 million, consisting of $1 million in marketable securities titled in Dad’s name and a $300,000 home they hold as tenants-by-the-entirety. They have “simple” or “sweetheart wills” that provide that all property passes outright to the survivor, and when neither is surviving, to their children. Dad dies in 1999. Absent a disclaimer, Dad’s estate tax applicable exclusion amount ($650,000 in 1999, and rising gradually each year until reaching $1 million in 2006) will be wasted, needlessly exposing Mom’s estate to as much as $260,000 in estate tax.
In this situation, Mom should be advised to strongly consider disclaiming $650,000 worth of securities. New Jersey law would treat Mom as predeceasing Dad, and, accordingly, the will would dictate that the disclaimed securities pass to the children. Having disclaimed $650,000 worth of securities, no estate tax will be owed by Mom’s estate, assuming, naturally, that her taxable estate is below the applicable exclusion amount at that time. Thus, in this situation, a disclaimer could achieve almost $260,000 in estate tax savings. However, Mom must be comfortable with relinquishing control of the disclaimed securities to her children.
15. Can the surviving spouse retain an interest in the disclaimed property? Yes. Under the Internal Revenue Code’s requirements for a qualified disclaimer, discussed in Question 9 above, it is generally not possible for an individual to disclaim property and then receive the benefits therefrom as the beneficiary of a trust to which that property devolved. This would violate the requirement that the disclaimant not accept the benefits of the disclaimed property (known as “the no-interest rule”).
However, the no-interest rule does not apply to a surviving spouse. Thus, the surviving spouse may disclaim an outright (i.e., non trust) interest in property in favor of a beneficial interest in a trust which holds the disclaimed property, without estate or gift-tax consequences.
Returning to the example set forth above in Question 15, Mom and Dad could draft their wills to provide that all of their respective property pass outright to the survivor, i.e., simple wills. But, given the amount of assets involved, currently $1.3 million, the simple wills could contain the following addition; any assets disclaimed by the survivor should be directed to pass to a trust for the benefit of the survivor.
The trust could be drafted to offer the survivor substantial enjoyment of the trust assets without corresponding estate tax inclusion. This type of trust is known as a “Bypass Trust” because, notwithstanding the survivor’s substantial enjoyment of the trust property, the assets remaining in the trust as of the date of the survivor’s death will bypass the survivor’s estate, thus preserving, and, perhaps, enhancing (if the trust properly appreciates), the applicable exclusion amount of the first spouse to die.
Mom is likely to be much more comfortable with a disclaimer of the securities in this situation, having retained enjoyment of the disclaimed assets for the remainder of her lifetime.
16. Can a surviving joint tenant or tenant-by-the-entirety make a qualified disclaimer in order to fund a Bypass Trust? Yes. Recently issued Treasury regulations substantially clarify the rules regarding disclaimers of jointly held property owned as tenants-by-the-entirety.
Perhaps the most significant modification to the new regulations is the general rule that eliminates the distinction between joint tenancies that are not unilaterally severable (e.g., tenancies-by-the-entirety) and those that are. Under the old regulations, disclaimers of survivorship interests that were not unilaterally severable had to be made within nine months of the creation of the tenancy (emphasis added).
The new regulations, which are effective for disclaimers made on or after Dec. 31, 1997, eliminate this distinction for all property other than joint bank, brokerage and investment accounts, by providing that a surviving joint owner may disclaim a survivorship interest in a tenancy within nine months of the date of death of the first owner to die, whether or not the tenancy is unilaterally severable (emphasis added).
Thus, different rules apply under the new regulations for bank, brokerage and investment accounts versus all other property. For real property and all property other than joint bank, brokerage and investment accounts, the survivorship interest to which the survivor succeeds by operation of law upon the death of the first joint owner to die may be disclaimed regardless of (1) how much of the property is attributable to consideration furnished by the disclaimant; (2) how much of the property is included in the decedent’s gross estate under I.R.C. sec. 2040; (3) whether the interest can be unilaterally severed under local law (see above); and (4) whether the joint owners are married (Treas. Reg. sec. 25.2518-1(c)(4)(i)). Note, however, that different rules apply to joint tenancies created on or after July 14, 1998 where the spouse of the donor is not a U.S. citizen (Treas. Reg. sec. 25.2518-1(c)(4)(ii)).
With respect to disclaimers of joint bank, brokerage and other investment accounts, the new regulations provide that where a transferor to that account can unilaterally withdraw the transferor’s contributions without the consent of the other co-tenant, the “transfer creating the survivor’s interest” (see Question 13 above) in the decedent’s share of the account occurs at the death of the deceased co-tenant. Therefore, the surviving co-tenant has nine months from the date of the deceased co-tenant’s death to disclaim the deceased co-tenant’s interest in the account. However, in contrast to the general rule for all property other than joint bank, brokerage and other investment accounts, the surviving co-tenant may not disclaim any portion of the account which is attributable to his or her contributions (Treas. Reg. sec. 25.2518-1(c)(4)(iii)).
consider the following scenario in light of the foregoing rules: Fred and Ethel are 75 and 72 years old, respectively, and the fair market value of their assets is presently $2 million. Their residence is held as tenants-by-the-entirety and is worth $500,000. The remaining $1.5 million in assets consist of joint brokerage accounts and joint bank accounts which wither Fred or Ethel may draw from without the consent of the other.
Fred retired as a self-employed businessman at age 70. Ethel was a homemaker. They have three children. Their wills provide for a mandatory Bypass Trust at the death of the first spouse to die, to be funded with an amount equal to the applicable exclusion amount. the balance of the decedent’s property is to pass outright to the survivor. When neither Fred nor Ethel is surviving, all of the property is to pass equally to the children, per stirpes.
Fred dies in 1999. Notwithstanding the manner in which the wills were drafted, all property will pass to Ethel by operation of law, thereby “bypassing” the Bypass Trust. However, if Ethel disclaims $650,000 worth of assets, she will be treated under New Jersey law a predeceasing Fred with respect to those assets (see Question 6 above), and, accordingly, those assets will pass as part of Fred’s probate estate. Thus, pursuant to the provisions of Fred’s will, the Bypass Trust will be fully funded. Notwithstanding that the residence was held as tenants-by-the-entirety, Ethel could disclaim her one-half survivorship interest pursuant to the new regulations, discussed above. The regulations provide that in the case of residential property, a surviving co-tenant will not be considered to have accepted the survivorship interest simply by residing in the residence prior to the disclaimer (Treas. Reg. sec. 25.2518-2(d)(1)). Ethel could also disclaim a portion of the joint brokerage and bank accounts since (1) she did not contribute to those accounts, and (2) either spouse could draw from the account without the consent of the other.
17. Do the new Treasury regulations relating to disclaimers of jointly held property obviate the need for married couples to sever joint assets? The new regulations obviate the need to separate real property held as tenants-by-the-entirety. However, with respect to jointly held bank, brokerage and investment accounts, the relative contributions of the parties must be examined.
In the example set forth above in Question 17, what if Ethel had died first? In that scenario, Fred could disclaim his survivorship interest in the residence, but since the brokerage and bank accounts were totally attributable to his contributions, the regulations would apparently prohibit him from making a qualified disclaimer of his survivorship interest in those accounts. Therefore, Fred and Ethel should have been advised to sever the accounts into separate tenant-in-common interests. Institutional agreements governing access to joint accounts must also be examined. If both signatures are required to make a withdrawal from the account (i.e., it is not unilaterally severable), the regulations would also prohibit a qualified disclaimer of the survivorship interest.
18. Can a surviving spouse make a qualified disclaimer of IRA/retirement accounts in order to fund a Bypass Trust? Yes. Consider again the situation of Fred and Ethel, described in Question 17 above, but now assume that Fred is a retired executive of a large company. Accordingly, instead of having $1.5 million in joint bank and brokerage accounts, Fred has $1.5 million in a Rollover IRA. In order for Ethel to have the opportunity to fund her Bypass Trust upon Fred’s death, the couple might consider naming Ethel as the primary beneficiary of the IRA, with the Bypass Trust as the contingent beneficiary. Ethel could then disclaim the amount necessary to fund the Bypass Trust. Under New Jersey law (see Question 6), she would be treated as predeceasing Fred with respect to the disclaimed benefits, and, thus, those benefits would be paid over to the Bypass Trust as the contingent beneficiary.
IRAs, qualified plans and I.R.C. sec. 403(b) annuities (referred to collectively for purposes of this discussion as “accounts”) are, however, more problematic than other assets since the income tax “basis step-up” to fair market value (I.R.C. sec. 1014) is not available; beneficiaries will pay income tax on all amounts attributable to employer contributions, the participant’s pretax contributions and all earnings thereon. In order to minimize the effect of such taxes, beneficiaries will generally seek to defer distributions from the account for as long a period as possible.
The rules relating to the minimum required distributions from IRAs, et al., are extremely complex, and are beyond the scope of this article. A detailed analysis of the relative Income and Estate Tax consequences of a potential disclaimer of benefits, also beyond the scope of this article, should be prepared and examined before deciding what portion, if any of the benefits should be disclaimed.
As a general matter, the manner in which the benefits are paid out depends on the identity of the beneficiary and whether the participant has reached his “required beginning date” on which distributions from the account must begin. The RBD is the later of April 1st of the calendar year following the later of (A) the calendar year following the year in which the participant reaches age 70 1/2, or (B) the calendar year in which the participant retires. However, if the participant is a 5 percent owner of the business to which the plan relates, option (B) is unavailable (I.R.C. sec. 401(a)(9)(C)). Where the beneficiary is a spouse, that spouse may roll over the benefits to his or her own IRA, or may defer distributions until the year that the deceased participant/spouse would have reached 70 1/2.
Where the beneficiary is not a spouse, but is a named individual or individuals (i.e., not the decedent’s estate), and the decedent has not reached the required beginning date, the benefits will generally be paid over the individual beneficiary’s life expectancy, or where multiple beneficiaries are named, the life expectancy of the oldest beneficiary. The named individual beneficiary (or individual beneficiaries) is known as a “designated beneficiary.”
If the participant dies after the RBD, the benefits will generally continue to be paid under the same distribution schedule in effect as of the date of the decedent’s death. Without the designation of a spouse or other designated beneficiary, the account must generally be paid out: (1) if the decedent dies before the RBD, by then end of the fifth year following death, or (2) if the decedent dies after the RBD, by Dec. 31st of the year following the decedent’s death.
A trust cannot qualify as a “designated beneficiary.” However, the Treasury regulations provide that the trust beneficiaries can be treated as having been designated as the beneficiaries of the account if the following requirements are met: (1) the trust is a valid trust under state law, or would be but for the fact that there is no corpus; (2) the trust is irrevocable, or will, by its terms, become irrevocable upon death; (3) the beneficiaries of the trust are identifiable from the trust instrument; and (4) certain documentation is provided to the plan administrator. The trust must meet these requirements as of the later of the date on which it is named as a beneficiary or the RBD, and for all periods thereafter during which the trust remains a beneficiary (Treasury Reg. sec. 1.401(a)(9)-1, Q&A D.5).
Returning to the situation of Fred and Ethel, since Fred was 75 when he died, he had reached his RBD. Payments from the IRA were being made to Fred over a period of 22 years, which was their joint life expectancy as of the RBD. As Fred’s surviving spouse, Ethel may roll over the IRA benefits which she does not disclaim to her own IRA. As discussed above, the disclaimed benefits will pass to the Bypass Trust created under Fred’s will. Since, as of the RBD, Ethel was the designated beneficiary, the benefits will continue to be paid to the trust over Fred and Ethel’s remaining joint life expectancy.
Had Fred died before the RBD and Ethel disclaimed a portion of the benefits, those disclaimed benefits would likewise pass to the Bypass Trust. Since Ethel would be the oldest “designated beneficiary” of the trust, the benefits, assuming the applicable requirements set forth above are satisfied, would be paid out over Ethel’s life expectancy. To reiterate, a detailed analysis of the relative income and estate tax consequences of any potential disclaimer of benefits should be prepared before proceeding.
19. Can a disclaimer be used to skip generations? Yes, provided that the will provides for the appropriate disposition of the disclaimed property, and the amount disclaimed will not cause a Generation Skipping Transfer Tax to be incurred.
Return again to the situation of Fred and Ethel, as described in Question 17 and 19 above. Assume now that Ethel dies 10 years after Fred. At that time, the assets in her name total $1 million. Since her applicable exclusion amount at that time is also $1 million, and the assets in the Bypass Trust created for her benefit at Fred’s death are not includible in her gross estate, no federal estate tax will be due. However, Ethel’s oldest son, Ricky, would like his one-third share of Ethel’s estate to pass to his two children (Recall from Question 13, that Ricky would not be able to make a qualified disclaimer of his interest in the Bypass Trust since the period within which he could disclaim that interest would have expired nine months after Fred’s death).
If Ricky disclaims his one-third share of the estate, he will be treated under New Jersey law as predeceasing Ethel (see Question 6 above). Accordingly, pursuant to the provisions of Ethel’s will, the disclaimed property will pass to Ricky’s children, effectively skipping Ricky’s generation.
However, care must be taken to avoid the Generation-Skipping Transfer Tax. The GST is imposed at a flat 55 percent of the value of all generation skipping transfers. A transfer from a grandparent to a grandchild is a generation-skipping transfer known as a “direct skip.” As discussed in Question 11 above, the effect of Ricky’s disclaimer for GST purposes is that the one-third share of Ethel’s estate to which he was otherwise entitled will be treated as if it had never been transferred to him. Accordingly, a “direct skip” of the property will have occurred. However, Ethel is entitled to a $1 million (adjusted annually for inflation, $1.01 million in 1999) GST exemption, which she may allocate to the transfer. Accordingly, no GST would be due.
This article is reprinted with permission from the May 24, 1999 issue of the New Jersey Law Journal ©1999 New Jersey Law Journal