[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Proposed Rules]
[Pages 43197-43202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21091]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 20 and 25

[REG-208215-91]
RIN 1545-AR52


Disclaimer of Interests and Powers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
treatment of disclaimers for estate and gift tax purposes. The 
regulations propose to clarify certain provisions governing the 
disclaimer of property interests and powers and, in addition, to 
conform the regulations to court decisions holding the current 
regulation invalid with respect to the disclaimer of joint property 
interests. The proposed regulations will affect persons who disclaim 
interests, powers or interests in jointly owned property after the 
effective date of these regulations.

DATES: Written comments and requests for a public hearing must be 
received by November 19, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-208215-91), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-208215-91), Courier's 
Desk Internal Revenue Service, 1111 Constitution Avenue NW, Washington, 
DC. Alternately, taxpayers may submit comments electronically via the 
Internet by selecting the ``Tax Regs'' option of the IRS Home Page, or 
by submitting comments directly to the IRS Internet site at http://
www.irs.ustreas.gov/prod/tax__ regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Dale Carlton, (202) 622-3090; concerning submissions, Michael 
Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document proposes to amend the Estate and Gift Tax Regulations 
(26 CFR parts 20 and 25) under sections 2041, 2046, 2056, 2511, 2514, 
and 2518, relating to the disclaimer of interests in property and 
powers over property.

1. Interests and Powers Subject to the Disclaimer Rules

    Under section 2518(a), if a person makes a qualified disclaimer, 
then for transfer tax purposes, the interest disclaimed is treated as 
never having passed to the person disclaiming. Under section 
2518(b)(2)(A), in order to have a qualified disclaimer, an interest 
must be disclaimed within 9 months of the date of ``the transfer 
creating the interest'' in the person disclaiming. A person to whom any 
interest passes by reason of the exercise or lapse of a general power 
of appointment must disclaim the interest passing within 9 months after 
the exercise or lapse.
    The current regulations provide that section 2518 applies to the 
disclaimer of interests or powers created pursuant to ``taxable 
transfers'' made after December 31, 1976. They further provide that the 
9-month period within which the disclaimer must be made is to be 
determined with reference to the ``taxable transfer'' creating the 
interest in the disclaimant. The term ``taxable transfer'' was 
incorporated into the regulation based on a statement in the 
legislative history underlying the enactment of section 2518. H.R. 
Conf. Rep. No. 1515, 94th Cong., 2d Sess. 623 (1976).
    Because the reference point under the regulation is the ``taxable 
transfer'' creating the interest, the existing regulation could be 
viewed as implying that the disclaimer of an interest created in a 
transfer that is outside the scope of the estate or gift tax need not 
comply with the requirements of section 2518. For example, if the 
disclaimed property constitutes an interest in foreign situs property 
created pursuant to a transfer by a nonresident alien donor or 
decedent, the transfer by the nonresident alien would not be within the 
scope of the gift tax or estate tax. However, a disclaimer of such an 
interest would have to comply with section 2518; otherwise, there could 
be transfer tax consequences to the disclaimant.
    Similarly, the regulations do not specifically address the 
disclaimer of a property interest passing as a result of the lapse or 
release of a general power of appointment created on or before October 
21, 1942. Under sections 2041(a)(1) and 2514(a), the lapse or release 
of a pre-1942 power is not subject to transfer tax.
    The scope of the term ``taxable transfer'', as used in 
Sec. 25.2511-1(c)(2), a related provision governing the disclaimer of 
interests created in taxable transfers made prior to January 1, 1977, 
was considered in the Eighth Circuit

[[Page 43198]]

decision in United States v. Irvine, 981 F.2d 991 (8th Cir. 1992), 
rev'd, 114 S.Ct 1473 (1994), and in Ordway v. United States, 908 F.2d 
890 (11th Cir. 1991). In these cases, the disclaimant argued that a 
disclaimer that did not satisfy the requirements of Sec. 25.2511- 
1(c)(2) was nonetheless effective for estate and gift tax purposes 
because the trust interest that was disclaimed was created pursuant to 
a transfer in trust made prior to the enactment of the federal gift 
tax. Accordingly, the disclaimant argued that the interest was not 
created in a ``taxable transfer'' prior to January 1, 1977, the 
regulation did not apply and the disclaimer had only to be effective 
under state law to avoid federal tax. The Service argued in both cases 
that the term ``taxable transfer'' references a generic completed gift 
under Sec. 25.2511-2 of the regulations. The Eleventh Circuit agreed 
with the Service in Ordway, while the Eighth Circuit disagreed in 
Irvine. The Supreme Court did not resolve this issue in its review of 
Irvine. The Court concluded that even if Sec. 25.2511-2 did not apply, 
the disclaimer caused the transfer of an interest that had not been 
timely disclaimed, and the transfer was subject to gift tax. In view of 
the conflicting Eighth and Eleventh Circuit decisions in Irvine and 
Ordway, the Treasury and the IRS believe that it is appropriate to 
clarify the regulations.

2. Disclaimer of Jointly-Owned Property

    The current regulations provide, in general, that in order to be a 
qualified disclaimer under section 2518, a surviving joint tenant's 
disclaimer of both an interest passing to the joint tenant on the 
creation of the tenancy, and the survivorship interest in the joint 
tenancy or tenancy by the entirety, must be made within 9 months after 
the transfer creating the tenancy. Further, a joint tenant cannot make 
a qualified disclaimer of any portion of a joint interest attributable 
to consideration furnished by that tenant. t
    Section 25.2518-2(c)(4)(ii) provides a special rule with respect to 
joint tenancies and tenancies by the entirety in real property created 
after 1976 but prior to 1982. During that period, section 2515 applied 
in determining the gift tax consequences of the creation of a joint 
tenancy with right of survivorship or tenancy by the entirety in real 
property between husband and wife. Under section 2515, the creation of 
the tenancy was not treated as a gift subject to gift tax unless the 
parties elected to treat the creation of the tenancy as a gift. Rather, 
a transfer subject to gift tax occurs on the termination of the tenancy 
(other than by reason of the death of one of the tenants) if the 
proceeds of termination are not divided according to the consideration 
furnished by each party to the tenancy. Under Sec. 25.2518-2(c)(4)(ii), 
in general, an interest in a tenancy created between 1976 and 1982 can 
be disclaimed within 9 months of the date of death of the first joint 
tenant to die, provided no election was made under section 2515 to 
treat the creation of the tenancy as a gift. The disclaimant can 
disclaim up to the portion of the tenancy included in the decedent's 
gross estate under section 2040.
    Section 2515 was enacted in the Internal Revenue Code of 1954, 
effective for tenancies created after December 31, 1954, and was 
repealed with respect to tenancies created after December 31, 1981, by 
the Economic Recovery Tax Act of 1981. The Technical and Miscellaneous 
Revenue Act of 1988 added section 2523(i)(3) which provides that, where 
the spouse of a donor is not a citizen of the United States, the 
principles of section 2515, as such section was in effect before its 
repeal, shall apply (except for the provisions providing for an 
election), in determining the gift tax consequences of the creation of 
a joint tenancy or tenancy by the entirety in real property between 
husband and wife.
    Although section 2515 was effective for tenancies created after 
1954 and before 1982, and, in addition, the principles of section 2515 
are currently effective for tenancies created on or after July 14, 
1988, where the donee spouse is not a citizen, the special rule in the 
current regulation applies only to tenancies subject to section 2515 
created after 1976 and before 1982.
    The validity of the current regulations with respect to joint 
interests that are unilaterally severable has been the subject of 
repeated litigation. In Kennedy v. Commissioner, 804 F.2d 1332 (7th 
Cir. 1986), the court held that the surviving spouse's survivorship 
interest in the decedent's one-half interest in jointly held real 
property was created on the decedent's death since, prior to that time, 
the decedent could have unilaterally severed the interest and defeated 
the spouse's survivorship right in that interest. Accordingly, the 
court held that the survivorship interest could be disclaimed within 9 
months of the decedent's death. The court concluded that the current 
regulations are invalid to the extent that they require a survivorship 
interest in a severable joint tenancy to be disclaimed within 9 months 
of the creation of the tenancy. In Estate of Dancy v. Commissioner, 872 
F.2d 84 (4th Cir. 1989) (involving personal property), and McDonald v. 
Commissioner, 853 F.2d 1494 (8th Cir. 1988) (involving real property), 
the courts also held the regulations invalid.
    In McDonald, the Eighth Circuit remanded the case to the Tax Court 
to determine if the disclaimer was otherwise qualified under section 
2518. On remand, the Service argued that since the joint property was 
attributable entirely to consideration furnished by the disclaiming 
spouse, the spouse could not disclaim any interest in the property 
under section 2518. The Tax Court rejected this argument in McDonald v. 
Commissioner, T.C.M. 1989-140.
    The Service announced in A.O.D. CC-1990-06 (Feb. 7, 1990) that it 
will follow these decisions.

3. Disclaimer of Joint Bank Accounts

    For gift tax purposes, the creation of a joint bank account is 
treated as an incomplete transfer since, generally, the contributing 
joint tenant may unilaterally withdraw contributed funds without the 
consent of the other joint tenant. Accordingly, unless a 
noncontributing joint tenant has withdrawn the funds, the transfer to a 
joint bank account does not become complete before the death of the 
first joint tenant.

Explanation of Provisions

1. Interests and Powers Subject to the Disclaimer Rules

    The proposed amendment clarifies that the application of section 
2518, or the commencement of the 9-month period, is not dependent on 
the actual imposition of a transfer tax when the interest to be 
disclaimed is created. The proposed amendment substitutes the statutory 
language of section 2518(b)(2)(A), ``transfer creating the interest,'' 
for ``taxable transfer'' as the reference point for determining the 
scope of the regulations as well as when the time period for making the 
disclaimer commences. Under the proposed amendment, the term ``transfer 
creating the interest'' includes any inter vivos transfer that would be 
a completed gift under the gift tax regulations, whether or not a gift 
tax liability arises on the transfer and whether or not the transfer 
comes within the scope of the gift tax. Similarly, the amendment 
clarifies that, for testamentary transfers, the transfer creating the 
interest occurs on the date of the decedent's death, whether or not an 
estate tax is imposed on the transfer and whether or not the transfer 
comes within the scope of the estate tax. The amendment also clarifies 
that, in the

[[Page 43199]]

case of a disclaimer of an interest passing pursuant to the exercise, 
lapse, or release of a general power of appointment, the disclaimer 
must be made within 9 months of the exercise, lapse, or release of the 
power, regardless of whether the exercise, lapse, or release is subject 
to estate or gift tax. The proposed regulations make conforming changes 
to the estate and gift tax regulations.

2. Disclaimer of Jointly-Owned Property

    The proposed amendments would revise the regulations to provide 
that, in general, if a joint tenancy may be unilaterally severed by 
either party, then a surviving joint tenant may disclaim the one-half 
survivorship interest in property held in joint tenancy with right of 
survivorship within 9 months of the death of the first joint tenant to 
die, even if the surviving joint tenant provided some or all of the 
consideration for the creation of the tenancy.
    The rationale of the courts in Dancy, Kennedy, and McDonald does 
not apply to joint interests that cannot be unilaterally severed under 
applicable state law, such as interests held in tenancy by the 
entirety. In tenancies by the entirety, the donee spouse's joint 
interest in the property that cannot be unilaterally severed is created 
on the date the tenancy is created. Therefore, the proposed amendment 
to the regulations would reaffirm that any interest in a nonseverable 
cotenancy, including the survivorship interest, must be disclaimed 
within 9 months of the date of the creation of the tenancy. However, 
the Service requests comments on whether or under what circumstances 
(e.g., tenancy by the entirety ownership of a personal residence) the 
rule applicable to unilaterally severable interests should apply to 
interests that are not unilaterally severable.
    The proposed amendments would extend the special rule in 
Sec. 25.2518-2(c)(4)(ii) to tenancies created after December 31, 1954, 
and on or before December 31, 1981, the entire period during which 
section 2515 was in effect. In addition, the special rule would be 
expanded to include tenancies created on or after July 14, 1988, where 
the spouse of the donor is not a United States citizen. Under section 
2523(i)(3), the creation of such tenancies is also subject to the rules 
of former section 2515. The special rule reflects the gift tax 
treatment of the creation of a joint tenancy or tenancy by the entirety 
that was subject to section 2515. The relief afforded by the special 
rule will apply to all tenancies that were subject on creation to 
section 2515. Under the special rule, the amount that the surviving 
joint tenant can disclaim is dependent on the amount that is includible 
in the decedent's gross estate.

3. Disclaimer of Joint Bank Accounts

    The proposed regulations provide specific rules to address the 
disclaimer of joint bank accounts. Because the transfer creating the 
interest in the funds remaining in the bank account at the death of the 
first joint tenant to die occurs at that tenant's death, the 9-month 
period for making the qualified disclaimer commences on the death of 
the first joint tenant.
    The proposed regulations also clarify that a surviving joint tenant 
cannot disclaim any portion of the account attributable to that 
survivor's contribution to the account. These contributed funds are 
property owned by the survivor during the cotenancy and the survivor 
cannot disclaim property the survivor has always owned and never 
transferred. Further, the proposed regulations clarify that this rule 
applies even if only one-half of the property is included in the 
decedent's gross estate under section 2040(b) because the joint tenants 
are married.
    The proposed regulations also clarify the estate tax treatment of a 
disclaimed interest in a joint bank account. State law generally treats 
a disclaimant as predeceasing the decedent with respect to the 
disclaimed interest. The disclaimed interest in a joint bank account 
(the creation of which is treated as an incomplete gift under the gift 
tax regulations), would lose its character as joint property and pass 
through the decedent's probate estate. Accordingly, under such 
circumstances, the interest disclaimed is subject to inclusion in the 
decedent's gross estate under section 2033, rather than section 2040(a) 
(providing for inclusion based on the contribution of each tenant) or 
section 2040(b) (providing for inclusion of one-half the property in 
the case of certain joint tenancies between spouses). The balance of 
the account not subject to the disclaimer retains its character as 
joint property and is includible in the decedent's gross estate under 
either section 2040(a) or section 2040(b).
    These rules are also made applicable to joint brokerage accounts, 
since the transfer tax treatment of these accounts generally parallels 
the treatment of joint bank accounts. See Rev. Rul. 69-148, 1969-1 C.B. 
226.

Proposed Effective 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 proposed to be 
effective for transfers creating the interest or power to be disclaimed 
made after the date of publication as final regulations in the Federal 
Register. However, Treasury and the IRS do not view these amendments as 
prescribing any new rules for applying section 2518.
    The amendments to Sec. 25.2518-2(c)(4) (relating to the disclaimer 
of joint property and bank accounts) are proposed to be effective for 
disclaimers made after the date these regulations are published in the 
Federal Register as final regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in E.O. 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedures Act (5 
U.S.C. chapter 5) does not apply to these regulations and because the 
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, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place of the hearing will be published in 
the Federal Register.

Drafting Information

    The principal author of these regulations is Dale Carlton, Office 
of the Assistant Chief Counsel (Passthroughs and Special Industries). 
However, personnel from other offices of the IRS and Treasury 
Department participated in their development.

[[Page 43200]]

List of Subjects

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 20 and 25 are proposed to be 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:

    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 second 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). * * *
* * * * *
    (iii) The first and second sentences of paragraph (d)(6)(i) of this 
section are effective for transfers creating the power to be disclaimed 
made after the date of publication as final regulations in the Federal 
Register.
* * * * *
    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 chapter 12. 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 effective 
for transfers creating the interest to be disclaimed made after the 
date of publication as final regulations in the Federal Register.
    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, and paragraph (b) is 
revised.
    2. 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 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 interest occurs, see 
Sec. 25.2518-2 (c)(3) and (c)(4) of chapter 12. * * *
    (b) Disclaimer by a person other than a surviving spouse. If an 
interest in property passes to a person other than the surviving spouse 
from a decedent, 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 chapter 12.
    (c) Effective date. The first and second sentences of paragraphs 
(a) and (b) of this section are effective for transfers creating the 
interest to be disclaimed made after the date of publication as final 
regulations in the Federal Register.

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 
effective for transfers creating an interest to be disclaimed made 
after the date of publication as final regulations in the Federal 
Register.
* * * * *
    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 second 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 (5) of 
Sec. 25.2514-3(c) are effective for transfers creating the power to be 
disclaimed made after the date of publication as final regulations in 
the Federal Register.
* * * * *
    Par. 8. Section 25.2518-1 is amended as follows:
    1. Paragraph (a)(1) is revised.
    2. In paragraph (a)(2), the third, fourth, and fifth sentences of 
the Example are revised and a new sentence is added after the third 
sentence.
    3. A new paragraph (a)(3) is added.
    The additions and revisions read as follows:

[[Page 43201]]

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

    (a) * * * (1) In general. The rules described in Secs. 25.2518-1 
through 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) * * * 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) Section 25.2518-1(a)(1) is effective for transfers creating the 
interest to be disclaimed made after the date of publication as final 
regulations in the Federal Register.
* * * * *
    Par. 9. Section 25.2518-2 is amended as follows:
    1. Paragraph (c)(3) is redesignated as paragraph (c)(3)(i).
    2. Newly designated paragraph (c)(3)(i) is amended as follows:
    a. In the first, eighth, and eleventh sentences, the word 
``taxable'' is removed in each place it appears.
    b. In the third and ninth sentences, the language ``taxable 
transfer'' is removed and ``transfer creating an interest'' is added in 
each place it appears.
    c. The fourth, fifth, sixth, and seventh sentences are revised.
    d. A new sentence is added after the fourth sentence.
    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 (9) is redesignated as Example (13) 
and newly designated Example (13) is revised.
    7. In paragraph (c)(5), Example (8) is redesignated as Example (9) 
and newly designated Example (9) is revised.
    8. In paragraph (c)(5), Example (10) is redesignated as Example 
(12) and the first sentence of newly designated Example (12) is 
revised.
    9. In paragraph (c)(5), new Examples (8), (10), (11), (14), and 
(15), are added.
    The additions and revisions read as follows:


Sec. 25.2518-2  Requirements for a qualified disclaimer.

* * * * *
    (c) * * *
    (3)(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 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, 3 through 10, and 12 of paragraph (c)(3)(i) of 
this section are effective for transfers creating the interest to be 
disclaimed made after the date of publication as final regulations in 
the Federal Register.
    (4) Joint property--(i) Interests that are unilaterally severable. 
Except as provided in paragraph (c)(4)(iv) of this section with respect 
to joint bank accounts and joint brokerage accounts, in the case of an 
interest in a joint tenancy with right of survivorship or a tenancy by 
the entirety that either joint tenant can sever unilaterally under 
local law, a qualified disclaimer of the interest to which the 
disclaimant succeeds as donee upon creation of the tenancy must be made 
no later than 9 months after the creation of the tenancy. 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. See, however, section 2518(b)(2)(B) for a special rule 
in the case of disclaimers by persons under age 21. Except as provided 
in paragraph (c)(4)(iii) of this section (with respect to certain 
tenancies in real property created after 1954 and before 1982 and 
certain tenancies created on or after July 14, 1988), the interest that 
may be disclaimed within 9 months after the death of the first joint 
tenant to die is the interest to which the disclaimant succeeds by 
right of survivorship, 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. See Sec. 25.2518-2(c)(5), 
Example (7).
    (ii) Interests that are not unilaterally severable. Except as 
provided in paragraph (c)(4)(iii) of this section with respect to 
interests created after 1954 and before 1982 and certain interests 
created after July 14, 1988, if an interest in joint property with 
right of survivorship or an interest held as a tenant by the entirety 
is not unilaterally severable under local law, a qualified disclaimer 
of the interest or any portion of the interest must be made no later 
than 9 months after the transaction creating the tenancy. A tenant by 
the entirety or other cotenant who cannot unilaterally sever the 
interest under applicable local law cannot make a qualified disclaimer 
of any portion of the joint interest to the extent attributable to 
consideration furnished by that tenant even if the disclaimer is made 
within 9 months of the creation of the tenancy. See Sec. 25.2518-
2(c)(5), Example (8).
    (iii) Tenancies in real property between spouses created before 
1982 and 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 after 1954 and 
before 1982 where no election was made under section 2515, or 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 must make a 
qualified disclaimer no later than 9 months after the death of the 
first spouse to die. The surviving spouse may disclaim any portion of 
the joint interest that is includible in the decedent's gross estate 
under section 2040. See Sec. 25.2518-2(c)(5), Examples (9) and (10). 

[[Page 43202]]

    (iv) Special rule for joint bank and brokerage accounts established 
between spouses or between persons other than husband and wife. In the 
case of a transfer to a joint bank account or a joint brokerage 
account, if a transferor may unilaterally withdraw the transferor's own 
contributions from the account without the consent of the other 
cotenant, the transfer creating the survivor's interest in a 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 Sec. 25.2518-2(c)(5), Examples 13, 14 and 15, regarding the 
treatment of disclaimed interests under sections 2518, 2033 and 2040.
    (v) Effective date. This paragraph (c)(4) is effective for 
disclaimers made after the date of publication as final regulations in 
the Federal Register.
    (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, 1997, and is survived by A. On January 1, 1998, 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). On March 1, 1997, A purchases a parcel of real 
property that is conveyed to A and A's spouse, B, as tenants by the 
entirety. A provides the consideration for the purchase. Under 
applicable state law, the tenancy cannot be unilaterally severed by 
either tenant. In order to be a qualified disclaimer, any disclaimer 
by B of B's interest in the property must be made within 9 months of 
the creation of the tenancy (i.e., within 9 months of March 1, 
1997). Since A provided the entire consideration for the property 
and the tenancy is not unilaterally severable, A may not disclaim 
any interest in the tenancy.
    Example (9). On March 1, 1977, 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. H does not elect, under 
section 2515, to have the transaction treated as a transfer for 
purposes of Chapter 12. H dies on June 1, 1997. W can disclaim one-
half of the joint interest because this is the interest includible 
in H's gross estate under section 2040(b). Assuming that W's 
disclaimer is received by the executor of H's estate no later than 9 
months after June 1, 1997, and the other requirements of section 
2518(b) are satisfied, W's disclaimer of one-half of the property 
would be a qualified disclaimer because the transfer which created 
W's interest is treated as not occurring until H's death, since no 
election was made under section 2515. 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). Assume the same facts as in example (9) except 
that the land was purchased on March 1, 1989, and W is not a United 
States citizen. W has until 9 months after June 1, 1997, to make a 
qualified disclaimer, and can disclaim the entire joint interest 
because this is the interest includible in H's gross estate under 
section 2040(a). 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). In 1986, spouses A and B purchased a personal 
residence taking title as joint tenants with right of survivorship. 
Under applicable state law, the interest in the tenancy may be 
unilaterally severed by either party. B dies on July 10, 1997. 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, 
1998, 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.
    Example (12). H and W, husband and wife, reside in state X, a 
community property state. * * *
    Example (13). 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. The transfer is not a completed 
gift under Sec. 25.2511-1(h)(4). A dies on August 15, 1997, and B 
disclaims the entire amount in the bank account on October 15, 1997. 
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 
2033. The result would be the same if A and B were not married.
    Example (14). The facts are the same as Example (13), except 
that B, rather than A, dies on August 15, 1997. 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 (15). The facts are the same as Example (13), 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.
Margaret Milner Richardson,
Commissioner of Internal Revenue,
[FR Doc. 96-21091 Filed 8-20-96; 8:45 am]
BILLING CODE 4830-01-U