Spouse of deceased participant wants to defer distribution to contingent beneficiary

[eilano]

A deceased participant named his spouse as the primary beneficiary and his son as the contingent beneficiary. Spouse does want the distribution and wishes to defer the distribution to their son. I assume that she can do this, correct? What form will she need to complete in order to do this?

[Appleby]

A qualified disclaimer as described under IRC 2518 and satisfies state requirements . Some financial institutions or plans may provide a form. In most cases, the disclaimer is provided in a free form letter.

[mbozek]

A: Why does a qualfied disclaimer have to comply with state law requirements? IRC 2518 does not require a disclaimer to meet state law requirements and ERISA would preempt state laws. The only valid reason to for comply with state renunciation laws would be to avoid state gift tax in the few states that have a gift tax.

[Appleby]

mbozek, I do recall something about state law determining that a court approval may be required if the disclaimant is a minor or incapacitated. Can’t put my hands on the reference at this precise moment. I will check for it later. In the meantime, see REVENUE RULE 90-110 which states in part

A trustee's disclaimer that is ineffective under state law does not constitute a qualified disclaimer for purposes of section 2518 of the Code.

[mbozek]

Of course the disclaimant cannot disclaim any greater rights than possessed by the disclaimant under the instrument governing the property to be disclaimed. And a minor's rights cannot be discaimed without state ct approval. However, a disclaimer under 2518 is not required to conform to a state disclaimer law in order to be valid. See reg 25.2518-2.

[Appleby]

mbozek,

The cite you reference suggests that state law requirements must be met.

Further, all the reputable references that I have looked at says the disclaimer must satisfy the requirements of IRC 2518 and applicable state law. These include:

--The ERISA Outline Book by Sal Tripoli

--Panel Pension Library books

Your comments?

[Belgarath]

Appleby - FWIW - I looked into this a bit - mostly because the concept of someone disclaiming funds that were otherwise coming to them is so alien to me, and it piqued my interest. I say, show me the money! But the disclaimers by the executor in the case of a nearly simultaneous death, for example, made a lot of sense.

I don't read the 25.2518-2 reg as specifically requiring deference to local law. But maybe this comes into play in certain circumstances if it is an executor doing the disclaimer? This is way out of my bailiwick, so you'd have to be charitable to even rate my opinion as superficial - it probably isn't even that good. Here's a link to what I thought was a very good article, that told me far more than I wanted to know... you may find it interesting in your deliberations. It appeared to me, on a quick skim, that perhaps the issue of "severability" under local law is no longer an issue? (if that was even what you were referring to - perhaps not) Happy reading!

http://www.fpanet.org/journal/articles/199...p0599-art13.cfm

[mbozek]

Where does IRC 2518 or the regs require that a disclaimer meet state law in order to be valid under 2518? See estate of Lute, 19 Fsupp 2d 1047 ("disclaimer is valid if it meets the requirements of IRC 2518c3 even if it does not qualfiy as a disclaimer under state law"). I think the materials you cite need to be updated to reflect the final 2518 regs.

[Guest halka]

I'm looking at the other aspect of eilano's question -- "wants to defer distribution to contingent beneficiary." If you are using "defer" to simply mean "allow the son to receive the distribution instead of the spouse," that should be no problem -- provided the disclaimer meets regulatory requirement. However, if "defer" is intended to mean "the spouse wants to delay in time the distribution to the beneficiary," that is not possible. The disclaimer transfers all rights of disclaimant to the contingent bene -- including the right to take an immediate distribution (assuming the son is not a minor).

[Appleby]

Belgarath- charitable? Never!! I say bring out the gloves .

Just kidding - nuff respect. I place great value on your opinion and always look forward to your responses to posts on the site. I feel the same way about mbozek, even when he and I disagrees .

Thanks for the reference- good reading. I sent an E-mail to one of the authors, asking him his opinion of the state law requirement. I will let you know if he responds. (E-Mail returned undeliverable - resent 09/15/04)

In the meantime, see the court opinion at http://www.fpanet.org/journal/articles/199...p0599-art13.cfm

Some of the quotes from this reference includes the following

"The requirement that the disclaimed property pass "without any direction" from the person making the disclaimer means that the disclaimer must result in a valid passing of the disclaimed interest . . . by operation of state law." DePaoli v. Comm'r, 62 F.3d 1259,

In addition, a qualified disclaimer must also meet any state law requirements. Delaune v. U.S., 143 F.3rd 995, 1001 (5th Cir. 1998) ("[T]he clear terms of § 2518(b)(4) necessarily require the disclaimer itself be valid under state law, because only in such a situation can it be said that the interest passes 'as a result of the refusal' and 'without any direction on the part of the person making the disclaimer'."); Estate of Bennett, 100 T.C. 42, 67 (1993)

("[T]here must be a valid passing of an interest under State law requirements before a valid passing of an interest can be considered to have occurred for Federal estate tax law purposes."); see United States v. Irvine, 511 U.S. 224, 237-38 (1994)

mbozek, estate of Lute, 19 Fsupp 2d 1047 wasalso referenced .

Bailiwick? I had to look up that one .

[mbozek]

Under the final regs 25.2518-1©(1)(i), a disclaimer not valid under local law is valid under Fed gift tax law if the disclaimed interest is transferred to another party without any direction by the disclaimant. See reg. 25.2518-3(d) example 1 which permits a partial disclaimer of an interest even though state law provides for a transfer only of the entire interest, if the transfer otherwise meets the requirements of 2518. A transfer of an interest created transferred after 1981 is subject to both the above rule as well as IRC 2518©(3) which permits the disclaimer of an interest which would meet the requirements of IRC 2518 to be treated as a disclaimed interest even it it does not meet the requirements of state law, e.g., state law requires disclaimer to be made within 6 months of date interest is establshed.

Note: The proposed regs on 2518 required compliance with state laws but this was dropped in the final regs because there is no requirement in 2518 that a disclaimer must be effective under local law. See BNA tax management portfolio # 848, P. A-55. The Delaune case specifically notes that the transfer at issue in the case would have been a valid disclaimer under 2518©(3) even if not valid under state law had a transfer actually been attempted because ©(3) was enacted specifically for this situation. The Supreme ct case quote is discussing the esoteric question of when an individual must disclaim a contingent interest that was created under a trust established before the gift tax became law in 1932 not whether the disclaimer must conform to state law in order to be valid under 2518.