Disclaimer of Interests and Powers

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 20 and 25

[TD 8744]

RIN 1545-AR52

Disclaimer of Interests and Powers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the

treatment of disclaimers for estate and gift tax purposes. The

regulations clarify certain provisions governing the disclaimer of

property interests and powers and, in addition, conform the regulations

to court decisions holding the current regulation invalid with respect

to the disclaimer of joint property interests. The final regulations

will affect persons who disclaim property interests, powers, or

interests in jointly owned property.

DATES: Effective date:

The final regulations are effective December 31, 1997.

Applicability dates: The amendments to Secs. 25.2518-1(a) and

25.2518-2(c)(3) (substituting the statutory language in section

2518(b)(2)(A) ``transfer creating the interest,'' for ``taxable

transfer'') and conforming changes to Secs. 20.2041-3(d)(6)(i),

20.2046-1, 20.2056(d)-2(a) and (b), 25.2511-1(c)(1), 25.2514-3(c)(5),

are applicable for transfers creating the interest or power to be

disclaimed made on or after December 31, 1997. The amendments to

Sec. 25.2518-2(c)(4) (relating to the disclaimer of joint property and

bank accounts) are applicable for disclaimers made on or after December

31, 1997.

FOR FURTHER INFORMATION CONTACT: James F. Hogan (202) 622-3090 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On August 21, 1996, the IRS published in the Federal Register (61

FR 43197) a notice of proposed rulemaking (REG-208216-91) amending the

regulations under section 2518. The IRS received comments on the

proposed regulations; however, no request for a public hearing was

received so no public hearing was held. This document adopts final

regulations with respect to this notice of proposed rulemaking.

The proposed regulations substituted the statutory language of

section 2518(b)(2)(A), ``transfer creating the interest,'' for

``taxable transfer'' as the

[[Page 68184]]

reference point for determining when the 9-month time period for making

the disclaimer commences. This change clarifies that the starting point

for the 9-month period is not dependent on the actual imposition of a

transfer tax at the time that the interest to be disclaimed is created.

Comments with respect to the clarification in the proposed regulation

supported the change.

Under the proposed regulations, the one-half survivorship interest

in jointly-held property that was unilaterally severable could be

disclaimed within 9 months of the date of death of the first joint

tenant to die. The proposed regulations did not extend the same

treatment to joint interests that are not unilaterally severable (e.g.,

tenancies by the entirety), but the preamble invited comments on this

subject.

The comments received unanimously suggested that a surviving joint

tenant should be allowed to disclaim, within 9 months of the date of

death of the first joint tenant to die, his or her survivorship

interest in a tenancy, whether or not that tenancy is unilaterally

severable. The comments noted that parties purchasing a residence often

do not make an informed decision regarding whether the residence should

be held as joint tenants or tenants by the entirety, and generally are

not aware that the decision to take title to the property as either

joint tenants with right of survivorship or tenants by the entirety

will affect the ability to disclaim their interest in the property

after the death of the first joint tenant to die.

Accordingly, the final regulations allow the disclaimer of jointly-

held property that is not unilaterally severable on the same basis as

joint property that is unilaterally severable. Thus, a surviving joint

tenant may disclaim the one-half survivorship interest in property that

the joint tenant held either in joint tenancy with right of

survivorship or in tenancy by the entirety, within 9 months of the

death of the first joint tenant to die. The rule also significantly

simplifies the disclaimer of jointly-held property, eliminating certain

special rules that were dependent on the application of section 2515 to

the creation of the tenancy.

The proposed regulations provided rules regarding the disclaimer of

interests in joint bank accounts and brokerage accounts, generally

recognizing that the creation of such accounts are not completed gifts

under certain circumstances. Comments noted that other kinds of

investment accounts, such as accounts held at mutual funds, accord the

parties rights that are similar to the rights of parties with respect

to joint bank accounts and brokerage accounts. Accordingly, the final

regulations have expanded the special rule with respect to the

disclaimer of jointly-held bank and brokerage accounts to include

jointly-held investment accounts such as accounts held at mutual funds.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations, and because these regulations do

not impose a collection of information on small entities, the

Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Internal Revenue Code, the Notice of

Proposed Rulemaking preceding these regulations was submitted to the

Small Business Administration for comment on their impact on small

business.

Drafting Information

The principal author of these regulations is Dale Carlton, Office

of the Chief Counsel, IRS. Other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects

26 CFR Part 20

Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

Gift taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 20 and 25 are amended as follows:

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,

1954

Paragraph 1. The authority citation for part 20 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 20.2041-3 is amended as follows:

1. Paragraph (d)(6)(i) is amended by revising the first sentence

and by adding a new sentence after the first sentence.

2. Paragraph (d)(6)(iii) is added.

The additions and revisions read as follows:

Sec. 20.2041-3 Powers of appointment created after October 21, 1942.

* * * * *

(d) * * *

(6)(i) A disclaimer or renunciation of a general power of

appointment created in a transfer made after December 31, 1976, is not

considered to be the release of the power if the disclaimer or

renunciation is a qualified disclaimer as described in section 2518 and

the corresponding regulations. For rules relating to when the transfer

creating the power occurs, see Sec. 25.2518-2(c)(3) of this chapter. *

* *

* * * * *

(iii) The first and second sentences of paragraph (d)(6)(i) of this

section are applicable for transfers creating the power to be

disclaimed made on or after December 31, 1997.

* * * * *

Par. 3. Section 20.2046-1 is revised to read as follows:

Sec. 20.2046-1 Disclaimed property.

(a) This section shall apply to the disclaimer or renunciation of

an interest in the person disclaiming by a transfer made after December

31, 1976. For rules relating to when the transfer creating the interest

occurs, see Sec. 25.2518-2(c)(3) and (c)(4) of this chapter. If a

qualified disclaimer is made with respect to such a transfer, the

Federal estate tax provisions are to apply with respect to the property

interest disclaimed as if the interest had never been transferred to

the person making the disclaimer. See section 2518 and the

corresponding regulations for rules relating to a qualified disclaimer.

(b) The first and second sentences of this section are applicable

for transfers creating the interest to be disclaimed made on or after

December 31, 1997.

Par. 4. Section 20.2056(d)-2 is amended as follows:

1. Paragraph (a) is amended by revising the first sentence and

adding a new sentence after the first sentence.

2. Paragraph (b) is revised.

3. A new paragraph (c) is added.

The additions and revisions read as follows:

Sec. 20.2056(d)-2 Marital deduction; effect of disclaimers of post-

December 31, 1976 transfers.

(a) * * * If a surviving spouse disclaims an interest in property

passing to such spouse from the decedent, which interest was created in

a transfer made after December 31, 1976, the effectiveness of the

disclaimer will be determined by section 2518 and the corresponding

regulations. For rules relating to when the transfer creating the

[[Page 68185]]

interest occurs, see Sec. 25.2518-2(c)(3) and (c)(4) of this chapter. *

* *

(b) Disclaimer by a person other than a surviving spouse. If an

interest in property passes from a decedent to a person other than the

surviving spouse, and the interest is created in a transfer made after

December 31, 1976, and--

(1) The person other than the surviving spouse makes a qualified

disclaimer with respect to such interest; and

(2) The surviving spouse is entitled to such interest in property

as a result of such disclaimer, the disclaimed interest is treated as

passing directly from the decedent to the surviving spouse. For rules

relating to when the transfer creating the interest occurs, see

Sec. 25.2518-2(c)(3) and (c)(4) of this chapter.

(c) Effective date. The first and second sentences of paragraphs

(a) and (b) of this section are applicable for transfers creating the

interest to be disclaimed made on or after December 31, 1997.

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

Par. 5. The authority citation for part 25 is amended by adding an

entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 25.2518-2 is also issued under 26 U.S.C. 2518(b). * * *

Par. 6. Section 25.2511-1 is amended as follows:

1. In paragraph (c)(1), the fourth sentence is revised.

2. A new paragraph (c)(3) is added.

The additions and revisions read as follows:

Sec. 25.2511-1 Transfers in general.

* * * * *

(c)(1) * * * However, in the case of a transfer creating an

interest in property (within the meaning of Sec. 25.2518-2(c)(3) and

(c)(4)) made after December 31, 1976, this paragraph (c)(1) shall not

apply to the donee if, as a result of a qualified disclaimer by the

donee, the interest passes to a different donee. * * *

* * * * *

(3) The fourth sentence of paragraph (c)(1) of this section is

applicable for transfers creating an interest to be disclaimed made on

or after December 31, 1997.

* * * * *

Par. 7. Section 25.2514-3 is amended as follows:

1. Paragraph (c)(5) is amended by revising the first sentence and

adding a new sentence after the first sentence.

2. A new paragraph (c)(7) is added.

The additions and revisions read as follows:

Sec. 25.2514-3 Powers of appointment created after October 21, 1942.

* * * * *

(c) * * *

(5) * * * A disclaimer or renunciation of a general power of

appointment created in a transfer made after December 31, 1976, is not

considered a release of the power for gift tax purposes if the

disclaimer or renunciation is a qualified disclaimer as described in

section 2518 and the corresponding regulations. For rules relating to

when a transfer creating the power occurs, see Sec. 25.2518-2(c)(3). *

* *

* * * * *

(7) The first and second sentences of paragraph (c)(5) of this

section are applicable for transfers creating the power to be

disclaimed made on or after December 31, 1997.

* * * * *

Par. 8. Section 25.2518-1 is amended as follows:

1. Paragraph (a)(1) is revised.

2. In paragraph (a)(2), the last three sentences of the example are

removed and four new sentences are added in their place.

3. A new paragraph (a)(3) is added.

The additions and revisions read as follows:

Sec. 25.2518-1 Qualified disclaimers of property; In general.

(a) * * * (1) In general. The rules described in this section,

Sec. 25.2518-2, and Sec. 25.2518-3 apply to the qualified disclaimer of

an interest in property which is created in the person disclaiming by a

transfer made after December 31, 1976. In general, a qualified

disclaimer is an irrevocable and unqualified refusal to accept the

ownership of an interest in property. For rules relating to the

determination of when a transfer creating an interest occurs, see

Sec. 25.2518-2(c) (3) and (4).

(2) * * *

Example. * * * The transfer creating the remainder interest in

the trust occurred in 1968. See Sec. 25.2511-1(c)(2). Therefore,

section 2518 does not apply to the disclaimer of the remainder

interest because the transfer creating the interest was made prior

to January 1, 1977. If, however, W had caused the gift to be

incomplete by also retaining the power to designate the person or

persons to receive the trust principal at death, and, as a result,

no transfer (within the meaning of Sec. 25.2511-1(c)(2)) of the

remainder interest was made at the time of the creation of the

trust, section 2518 would apply to any disclaimer made after W's

death with respect to an interest in the trust property.

(3) Paragraph (a)(1) of this section is applicable for transfers

creating the interest to be disclaimed made on or after December 31,

1997.

* * * * *

Par. 9. Section 25.2518-2 is amended as follows:

1. The text of paragraph (c)(3) following the heading is

redesignated as paragraph (c)(3)(i) and amended as follows:

a. In the first, eighth, and eleventh sentences, the word

``taxable'' is removed in each place it appears.

b. In the second and ninth sentences, the language ``taxable

transfer'' is removed and ``transfer creating an interest'' is added in

each place it appears.

c. In the third sentence the language ``taxable transfers'' is

removed and ``transfers creating an interest'' is added.

d. The fourth, fifth, sixth, and seventh sentences are removed and

five new sentences are added in their place.

2-3. A new paragraph (c)(3)(ii) is added.

4. Paragraph (c)(4) is revised.

5. In paragraph (c)(5), Example (7) is revised.

6. In paragraph (c)(5), Example (8) is removed.

7. In paragraph (c)(5), Example (9) is redesignated as Example (12)

and is revised.

8. In paragraph (c)(5), Example (10) is redesignated as Example

(11) and the first sentence is revised.

9. In paragraph (c)(5), new Examples (8), (9), (10), (13), and

(14), are added.

The additions and revisions read as follows:

Sec. 25.2518-2 Requirements for a qualified disclaimer.

* * * * *

(c) * * *

(3) Transfer. (i) * * * With respect to transfers made by a

decedent at death or transfers that become irrevocable at death, the

transfer creating the interest occurs on the date of the decedent's

death, even if an estate tax is not imposed on the transfer. For

example, a bequest of foreign-situs property by a nonresident alien

decedent is regarded as a transfer creating an interest in property

even if the transfer would not be subject to estate tax. If there is a

transfer creating an interest in property during the transferor's

lifetime and such interest is later included in the transferor's gross

estate for estate tax purposes (or would have been included if such

interest were subject to estate tax), the 9-month period for making the

qualified disclaimer is determined with reference to the earlier

transfer creating the interest. In the case of a general

[[Page 68186]]

power of appointment, the holder of the power has a 9-month period

after the transfer creating the power in which to disclaim. If a person

to whom any interest in property passes by reason of the exercise,

release, or lapse of a general power desires to make a qualified

disclaimer, the disclaimer must be made within a 9-month period after

the exercise, release, or lapse regardless of whether the exercise,

release, or lapse is subject to estate or gift tax. * * *

(ii) Sentences 1 through 10 and 12 of paragraph (c)(3)(i) of this

section are applicable for transfers creating the interest to be

disclaimed made on or after December 31, 1997.

(4) Joint property--(i) Interests in joint tenancy with right of

survivorship or tenancies by the entirety. Except as provided in

paragraph (c)(4)(iii) of this section (with respect to joint bank,

brokerage, and other investment accounts), in the case of an interest

in a joint tenancy with right of survivorship or a tenancy by the

entirety, a qualified disclaimer of the interest to which the

disclaimant succeeds upon creation of the tenancy must be made no later

than 9 months after the creation of the tenancy regardless of whether

such interest can be unilaterally severed under local law. A qualified

disclaimer of the survivorship interest to which the survivor succeeds

by operation of law upon the death of the first joint tenant to die

must be made no later than 9 months after the death of the first joint

tenant to die regardless of whether such interest can be unilaterally

severed under local law and, except as provided in paragraph (c)(4)(ii)

of this section (with respect to certain tenancies created on or after

July 14, 1988), such interest is deemed to be a one-half interest in

the property. (See, however, section 2518(b)(2)(B) for a special rule

in the case of disclaimers by persons under age 21.) This is the case

regardless of the portion of the property attributable to consideration

furnished by the disclaimant and regardless of the portion of the

property that is included in the decedent's gross estate under section

2040 and regardless of whether the interest can be unilaterally severed

under local law. See paragraph (c)(5), Examples (7) and (8), of this

section.

(ii) Certain tenancies in real property between spouses created on

or after July 14, 1988. In the case of a joint tenancy between spouses

or a tenancy by the entirety in real property created on or after July

14, 1988, to which section 2523(i)(3) applies (relating to the creation

of a tenancy where the spouse of the donor is not a United States

citizen), the surviving spouse may disclaim any portion of the joint

interest that is includible in the decedent's gross estate under

section 2040. See paragraph (c)(5), Example (9), of this section.

(iii) Special rule for joint bank, brokerage, and other investment

accounts (e.g., accounts held at mutual funds) established between

spouses or between persons other than husband and wife. In the case of

a transfer to a joint bank, brokerage, or other investment account

(e.g., an account held at a mutual fund), if a transferor may

unilaterally regain the transferor's own contributions to the account

without the consent of the other cotenant, such that the transfer is

not a completed gift under Sec. 25.2511-1(h)(4), the transfer creating

the survivor's interest in the decedent's share of the account occurs

on the death of the deceased cotenant. Accordingly, if a surviving

joint tenant desires to make a qualified disclaimer with respect to

funds contributed by a deceased cotenant, the disclaimer must be made

within 9 months of the cotenant's death. The surviving joint tenant may

not disclaim any portion of the joint account attributable to

consideration furnished by that surviving joint tenant. See paragraph

(c)(5), Examples (12), (13), and (14), of this section, regarding the

treatment of disclaimed interests under sections 2518, 2033 and 2040.

(iv) Effective date. This paragraph (c)(4) is applicable for

disclaimers made on or after December 31, 1997.

(5) Examples. * * *

* * * * *

Example (7). On February 1, 1990, A purchased real property with

A's funds. Title to the property was conveyed to ``A and B, as joint

tenants with right of survivorship.'' Under applicable state law,

the joint interest is unilaterally severable by either tenant. B

dies on May 1, 1998, and is survived by A. On January 1, 1999, A

disclaims the one-half survivorship interest in the property to

which A succeeds as a result of B's death. Assuming that the other

requirements of section 2518(b) are satisfied, A has made a

qualified disclaimer of the one-half survivorship interest (but not

the interest retained by A upon the creation of the tenancy, which

may not be disclaimed by A). The result is the same whether or not A

and B are married and regardless of the proportion of consideration

furnished by A and B in purchasing the property.

Example (8). Assume the same facts as in Example (7) except that

A and B are married and title to the property was conveyed to ``A

and B, as tenants by the entirety.'' Under applicable state law, the

tenancy cannot be unilaterally severed by either tenant. Assuming

that the other requirements of section 2518(b) are satisfied, A has

made a qualified disclaimer of the one-half survivorship interest

(but not the interest retained by A upon the creation of the

tenancy, which may not be disclaimed by A). The result is the same

regardless of the proportion of consideration furnished by A and B

in purchasing the property.

Example (9). On March 1, 1989, H and W purchase a tract of

vacant land which is conveyed to them as tenants by the entirety.

The entire consideration is paid by H. W is not a United States

citizen. H dies on June 1, 1998. W can disclaim the entire joint

interest because this is the interest includible in H's gross estate

under section 2040(a). Assuming that W's disclaimer is received by

the executor of H's estate no later than 9 months after June 1,

1998, and the other requirements of section 2518(b) are satisfied,

W's disclaimer of the property would be a qualified disclaimer. The

result would be the same if the property was held in joint tenancy

with right of survivorship that was unilaterally severable under

local law.

Example (10). In 1986, spouses A and B purchased a personal

residence taking title as tenants by the entirety. B dies on July

10, 1998. A wishes to disclaim the one-half undivided interest to

which A would succeed by right of survivorship. If A makes the

disclaimer, the property interest would pass under B's will to their

child C. C, an adult, and A resided in the residence at B's death

and will continue to reside there in the future. A continues to own

a one-half undivided interest in the property. Assuming that the

other requirements of section 2518(b) are satisfied, A may make a

qualified disclaimer with respect to the one-half undivided

survivorship interest in the residence if A delivers the written

disclaimer to the personal representative of B's estate by April 10,

1999, since A is not deemed to have accepted the interest or any of

its benefits prior to that time and A's occupancy of the residence

after B's death is consistent with A's retained undivided ownership

interest. The result would be the same if the property was held in

joint tenancy with right of survivorship that was unilaterally

severable under local law.

Example (11). H and W, husband and wife, reside in state X, a

community property state. * * *

Example (12). On July 1, 1990, A opens a bank account that is

held jointly with B, A's spouse, and transfers $50,000 of A's money

to the account. A and B are United States citizens. A can regain the

entire account without B's consent, such that the transfer is not a

completed gift under Sec. 25.2511-1(h)(4). A dies on August 15,

1998, and B disclaims the entire amount in the bank account on

October 15, 1998. Assuming that the remaining requirements of

section 2518(b) are satisfied, B made a qualified disclaimer under

section 2518(a) because the disclaimer was made within 9 months

after A's death at which time B had succeeded to full dominion and

control over the account. Under state law, B is treated as

predeceasing A with respect to the disclaimed interest. The

disclaimed account balance passes through A's probate estate and is

no longer joint property includible in A's gross estate under

section 2040. The entire account is, instead, includible in A's

gross estate under section

[[Page 68187]]

2033. The result would be the same if A and B were not married.

Example (13). The facts are the same as Example (12), except

that B, rather than A, dies on August 15, 1998. A may not make a

qualified disclaimer with respect to any of the funds in the bank

account, because A furnished the funds for the entire account and A

did not relinquish dominion and control over the funds.

Example (14). The facts are the same as Example (12), except

that B disclaims 40 percent of the funds in the account. Since,

under state law, B is treated as predeceasing A with respect to the

disclaimed interest, the 40 percent portion of the account balance

that was disclaimed passes as part of A's probate estate, and is no

longer characterized as joint property. This 40 percent portion of

the account balance is, therefore, includible in A's gross estate

under section 2033. The remaining 60 percent of the account balance

that was not disclaimed retains its character as joint property and,

therefore, is includible in A's gross estate as provided in section

2040(b). Therefore, 30 percent (\1/2\ x 60 percent) of the account

balance is includible in A's gross estate under section 2040(b), and

a total of 70 percent of the aggregate account balance is includible

in A's gross estate. If A and B were not married, then the 40

percent portion of the account subject to the disclaimer would be

includible in A's gross estate as provided in section 2033 and the

60 percent portion of the account not subject to the disclaimer

would be includible in A's gross estate as provided in section

2040(a), because A furnished all of the funds with respect to the

account.

* * * * *

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: December 10, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97-33394 Filed 12-30-97; 8:45 am]

BILLING CODE 4830-01-P