Fall 2004 Newsletter
THE NEW VIRGINIA DISCLAIMER ACT
By Avram H. Zysman, J.D., L.L.M
Virginia passed the Uniform Disclaimer of Property Interest Act, Va. Code Sec. 64.1-196, in April of 2003, a comprehensive statute which clarifies many unresolved issues pertaining to this useful postmortem technique. This article will highlight some of the major issues clarified by the statute, including: (1) the type of interest that may be disclaimed, (2) the party to whom the disclaimer must be sent, (3) when the disclaimer takes effect (4) fiduciary disclaiming and (5) creditor rights.
As most estate planning practitioners know, there are seven requirements for a disclaimer to be "qualified" under Internal Revenue Code ("IRC") Section 2518. Under this Section, in order for the disclaimer to effectively avoid taxation of the interest transferred to the disclaimant, the disclaimer must satisfy seven basic requirements. The disclaimer must: (1) be irrevocable and unqualified, (2) be in writing, (3) identify the specific interest being disclaimed, (4) be signed by the disclaimant or legal representative of the disclaimant, (5) be received by the person transferring the interest, their legal representative or holder of legal title to the property, (6) be received no later than nine (9) months after the date the transfer created the interest, or if the disclaimer is younger than 21 years of age, when the disclaimant reaches age 21 and (7) be exercised before the disclaimant accepts any interest or benefit. If a disclaimer is qualified under the federal statute, it also is a valid disclaimer under the Virginia Statute. Va. Code Sec. 64.1-196.13.
However, there are other requirements imposed by the Virginia Statute that serve to clarify aspects of the federal law. Also, it is important to remember that the IRC rules only affect disclaimers for purposes of federal estate and generation skipping taxation. There are a host of other reasons to disclaim an interest in property which do not concern taxation at all. Disclaiming to avoid possession of environmentally contaminated Page 9 property, to avoid creditor claims, to accomplish charitable objectives, to transfer inherited business interests without adverse income tax consequences, and to revise drafting errors unrelated to taxation are just some of the non-tax benefits that can be gained from disclaiming unwanted property interests. All of us engaged in after death administration would thus do well to master the requirements contained in the Virginia statute.
What Type of Interest May Be Disclaimed?
There have been several outstanding issues in regards to the type of property interest that may be disclaimed in Virginia. The short answer is that any interest in property may be disclaimed. Va. Code Sec. 64.1-196.4(A) and (E). A disclaimant may disclaim not only gifts, but any portion of a gift. For example, where a husband has passed all of his company shares to his wife, the wife may want to disclaim merely a percentage of her interest in the company to her children, retaining control or enough of an income interest to support her.
Powers of appointment granted inappropriately may be disclaimed, such as where a decedent transferred a general power of appointment in a family (credit shelter) trust, thereby exposing the trust to estate tax at the surviving spouse's death. A surviving spouse need not give up her entire interest (income and principal) in a family trust to shelter the decedent's unified credit amount, but may only disclaim away the power of appointment granted therein.
A recipient may want to disclaim a portion of environmentally contaminated property, keeping the unexposed parcel and leaving a costly mess to the subsequent takers or, if none, to the state. The ability in the statute for disclaimers of previously disclaimed interests is especially helpful in this situation.
Another disputed issue that has been resolved is the impact of spendthrift clauses on the ability of a recipient to disclaim. A typical spendthrift clause, sometimes referred to· as a "protective clause," prohibits a· beneficiary from alienating his or her interest in property. The purpose of this clause is to protect the beneficiary from his or her creditors. However, under the statute, is a disclaimer an "alienation" of property which would be prohibited by a spendthrift clause? The answer is clearly "no." Va. Code Sec. 64.1-196.4(A)(B). A beneficiary may lawfully disclaim any interest even if the creator of the interest imposed a specific restriction on the ability to disclaim the interest. In other words, the recipient can disclaim the spendthrift clause itself!
When must the disclaimer be received?
If a disclaimer is to be effectuated within nine months, it is important to be clear about when a disclaimer must be filed in order for it to fall within the required time period. If the interest to be disclaimed is created by a will, trust or other instrument the disclaimer must be delivered within nine months after the instrument becomes irrevocable. Va. Code Sec. 64.1-196.5(B)(1). A disclaimant of an irrevocable trust interest must therefore disclaim an interest passing to her within nine months after the execution of the trust. An interest passing by will or revocable trust would need to be disclaimed nine months after the date of the testator' s or settlor's death. This would naturally also apply to an interest created by intestate succession or beneficiary designation.
A disclaimant of jointly held property or property held as tenants by the entirety must disclaim within nine months after the death of the first tenant. Va. Code Sec. 64.1 -196.6(B). The death of the first tenant serves as a clear notice to the surviving tenant that a disclaimer must be made if the survivor chooses to do so.
On the other hand, recipients of powers of appointment or takers in default of appointment must exercise their disclaimer when the instrument creating the power becomes irrevocable. Va. Code .Sec. 64.1-196.8(1); Sec.64.1-196.9. This may be problematic as the recipient may not be aware that they have received a power to appoint. If a general power of appointment is created in the family trust of an irrevocable life insurance trust, for example, the disclaimer would take effect when the instrument becomes irrevocable and would need to be made then. In all likelihood, it will be too late when the recipient of the power discovers the need to disclaim the power.
When must a disclaimer be sent?
The Code has alleviated some of the confusion estate administrators have had in identifying the appropriate person to whom to send the disclaimer. See, Va. Code Sec. 64.1-196.11. Most of us have resorted to sending the disclaimer to the court with jurisdiction over the matter in many situations because of a lack of certainty otherwise. Under the Statute, the court of competent jurisdiction will always be the last appropriate recipient where one is unable to deliver the disclaimer to those preceding the court on the list, and it is always a good idea to file the disclaimer with the court as well. However, the statute provides the following guidance as to the appropriate primary recipients, when available:
Finally, in addition to the primary recipients listed, any disclaimer of an interest in real property must also be recorded in the Office of the Clerk of the Circuit Court for the jurisdiction in which the real property is located. Va. Code Sec. 64.1-196.14.
AVRAM H. ZYSMAN graduatedfrom law school in 1997and joined a New York City law firm as a Trusts and Estates attorney where he advised clients regarding complex individual, trust and business taxation issues, as well as charitable strategies and private foundations. He has also been an advocate on behalfofincapacitated children, adults, elderly hospital patients and nursing home residents and drafted trusts for special needs children.
Abe received his J.D. from The New York Law School and a Master of Laws (LL.M.) in Estate Planning from the University of Miami School of Law. He is licensed to practice law in New York and Virginia and currently practices with Ferris & Associates in Williamsburg, Virginia.