Disclaimers and the charitable deduction
Tax Facts | National Underwriter Company
The Eighth Circuit has affirmed a Tax Court decision that allowed an estate tax charitable deduction for a disclaimed interest that passed to a charitable foundation. The decedent's will provided that the amount that passed to the foundation would be a percentage of the disclaimed property. The courts did not allow the charitable deduction where the disclaimed property passed to a CLAT in which the disclaimant had a remainder interest. In that situation, the disclaimer was not qualified because it was a partial disclaimer.
In general, a person can disclaim an interest in property by refusing to accept the property. A person disclaiming property in a qualified disclaimer is not treated as making a gift to the person to whom the property passes as a result of the disclaimer. The disclaimant cannot accept or retain an interest in the disclaimed property. The property must generally pass to a person other than the disclaimant without any direction on the part of the person making the disclaimer. A disclaimer must generally occur within nine months of the transfer creating the interest being disclaimed. IRC Sec. 2518.
Decedent's estate left everything to her daughter. Apparently, decedent's will anticipated that the daughter would disclaim part of her inheritance. The will provided that 25 percent of any disclaimed property would go to a charitable foundation and 75 percent to a charitable lead annuity trust (CLAT). The foundation is the lead annuity beneficiary in the CLAT. The daughter received the remainder interest in the CLAT. However, if the daughter is not alive in 20 years when the CLAT terminates, the remainder would go to the charitable foundation.
The daughter disclaimed part of her inheritance. Part of the disclaimed amount passed to the foundation and part to the CLAT. The estate claimed an estate tax charitable deduction for the amount passing to the foundation. It also claimed a charitable deduction for the annuity interest in the CLAT.
The Tax Court disallowed the charitable deduction for the annuity interest in the CLAT passing to charity. The court noted that disclaimed property must generally pass to a person other than the disclaimant. The daughter had a remainder interest in the CLAT to which the property passed. Thus, the daughter's disclaimer for the interest passing to the CLAT was not qualified.
The Tax Court allowed the charitable deduction for the amount passing to the foundation. The court acknowledged that the amount of the charitable deduction increased because of the disclaimer. The court noted, however, that this was because the disclaimed property was treated as though it passed though the estate (and not from the disclaimant) and the will provided that a certain percentage of any disclaimed property would go to the foundation. This court distinguished this provision from a tax-savings clause that would be against public policy because it attempted to change the transfer if the IRS or a court made an adverse ruling with respect to the transfer.
On appeal, the Eighth Circuit addressed the IRS's argument that the amount passing to charity increased because the IRS established a higher value for the property includable in the gross estate and that this was against public policy because it discouraged the IRS form contesting valuation because any change would be offset by a charitable deduction. The court noted first that it was the IRS's role to determine that taxes were administered fairly and correctly, and not necessarily to increase the amount collected. The court then stated that it was not concerned with the issue here, because charities and state attorney generals are required to act to protect amounts going to charity.
A great deal of flexibility can be built into an estate plan by providing for alternative beneficiaries when a beneficiary disclaims an interest. But this case illustrates a potential peril where the beneficiary disclaiming would receive an interest in the disclaimed property as an alternative beneficiary. A possible solution in this case might have been for the daughter to have also disclaimed her remainder interest in the CLAT. To compensate for the loss of that property, the daughter might have disclaimed a smaller part of the overall estate.
Est. of Christiansen v. Comm., 2009-2 USTC ¶60,585 (8th Cir. 2009), aff'g 130 TC No. 1 (2008).
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