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Estate Planning: Disclaiming Gifts

by Rebecca K. Wohltman, Associate

Disclaimers are effective tools, but…

Disclaiming a gift can be beneficial for estate and tax planning purposes, but it does not defeat an IRS lien.

What is a disclaimer? A disclaimer is a function of state law wherein a person receiving a gift from an estate or a trust can decline to receive that gift. Although states have slightly different versions of laws governing disclaimer, in Illinois, the person disclaiming, or declining, the gift is treated as if he or she died before the event triggering the gift to the disclaimant. In most situations, a disclaimer means that the disclaimant is considered to have predeceased, or died before, the person whose trust or estate is being distributed.

When a person disclaims a gift, the gift passes to another party as directed in the will or trust that first directed the disclaimed gift. The disclaimant cannot direct the gift to another person.

A disclaimer can be a useful estate planning tool to avoid increasing the value of an individual’s estate above the exemption amount and to pass assets to the next generation. For example, assume a grandfather dies and in his will leaves everything to his daughter, or if his daughter is not living, to his grandchildren. If the daughter disclaims her interest in her father’s estate, the grandchildren will receive their grandfather’s assets.

However, assume the IRS has a lien against daughter’s property and rights to property. In that case, daughter’s disclaimer is not valid and the IRS will be able to seize the disclaimed assets. In Drye v. U.S., the U.S. Supreme Court concluded that a disclaimer under Arkansas law, which is nearly identical to Illinois law, did not defeat a tax lien.

The Supreme Court’s rationale for reaching this conclusion was that an heir who disclaims a gift after the gifting party dies “exerts dominion” over the property by deciding whether he, or someone else, will receive the property because he has “the unqualified right to receive the entire value of [the] estate… or to channel that value to [another beneficiary].” On the contrary, the Court noted, a disclaimant who disclaims a gift during the donor’s lifetime leaves the donor free to distribute the gift to someone else. The right to either receive the bequest or to pass it to someone else by disclaimer is enough of a property right for an IRS lien to attach.  Disclaimers can be useful estate planning tools, but not to defeat an IRS lien.

Rebecca K. Wohltman is an associate with the Belleville office of Mathis, Marifian and Richter, Ltd.  She focuses her practice on transactional work and estate planning.  Please contact Rebecca with any of your estate planning needs.

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