[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Rules and Regulations]
[Pages 68183-68187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33394]
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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