Disclaimers

A transfer of property from a donor to the donee is a gift, whether the transfer occurs during the donor's lifetime (inter vivos gift) or after the donor's death. There are 3 recognized elements to any gift:

  1. the intention to give a gift,
  2. its delivery,
  3. and acceptance.

A disclaimer is a refusal to accept a gift of inheritance. When an heir or beneficiary disclaims an inheritance, it has the legal effect of the disclaimant predeceasing the decedent or before the property is distributed; the title to the property never passes to the disclaimant.

There are 2 primary benefits to a disclaimer: to avoid or reduce taxes and to avoid the claims of creditors. If an heir first took title to the property then gave it to another, the heir may have to claim the inheritance as income and may also be liable for gift taxes after giving the inheritance to someone else. Furthermore, if the next in line after the disclaimant earns less income than the disclaimant and the property earns an income, then income taxes will be reduced for the recipient of the disclaimed property. Hence, disclaimers may reduce tax liability for both parties.

Under common law, a disclaimer only applies to probate property, but the modern trend is to extend disclaimers to nonprobate property as well. Although the Uniform Disclaimer of Property Interests Act (UDPIA) (incorporated into UPC §2-1101 – 1107), provides no time limit to filing a disclaimer, most state statutes require that a disclaimer be filed within 9 months of the donor's death. To avoid gift tax liability, the Internal Revenue Service also requires that the disclaimer be a qualified disclaimer, which must satisfy all the following conditions (Internal Revenue Code §2518):

Without a disclaimer, an heir's creditors could attach the estate property after a default by the heir, and if the heir transferred the property before the creditors attached it, the creditors could have the transfer reversed under fraudulent conveyance laws.

Because the disclaimant never takes legal title to the property, the disclaimant incurs no gift tax liability nor can most creditors of the disclaimant reach the property. However, there is an exception when the state or federal government is the creditor, either for taxes or for reimbursement for Medicaid, which is a state-federal cooperative program providing payment for required medical services for poor people. In Troy v. Hart, a Medicaid recipient disclaimed his inheritance, allowing it to pass to his sisters, so that he could continue to qualify for Medicaid. However, the court ruled that it was against public policy to allow such a disclaimer, so it created a constructive trust so that the state can file any claims for reimbursement of Medicaid benefits.

Since IRC §6321 attaches a federal lien on all property or interests in property of a taxpayer for defaulted taxes, a disclaimer does not remove the tax lien, since state law gives the disclaimant the right to receive the property but, instead, voluntarily disclaims it. Once the property interest is established by state law, as reasoned in Drye v. United States, 528 U.S. 49 (1999), then state law is inoperative in preventing an attachment of a federal tax lien on that property. Hence, the Supreme Court ruled that since Drye had a property interest in his mother's $233,000 estate, it was subject to federal tax liens imposed for defaulted taxes.

A minority of states do not allow an insolvent debtor to disclaim property. Under federal bankruptcy law, a disclaimer is usually effective before the disclaimant files for bankruptcy, but after the filing of bankruptcy and within 180 days of the filing, any inherited property or rights thereof or any other received benefit because of the death of another, such as the proceeds of life insurance, belongs to the bankruptcy estate and not to the heir, and, thus, cannot be disclaimed. §541(a)(5)