Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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Disclaimers are primarily a gift tax concept; the point of having a “qualified disclaimer” is to avoid having a gift tax imposed on the disclaimant’s act of refusing to accept an inheritance. However, when the inherited property is a retirement plan, the income tax consequences of this act may be even more important than the gift tax effects. § 2518 recognizes qualified disclaimers “for purposes of this subtitle.” § 2518 is part of Subtitle B of the Code, “Estate and Gift Taxes.” Income taxes are governed by Subtitle A. Except for a minor provision dealing with disclaimers of powers by a trust beneficiary ( § 678(d) ), there is no Code provision dealing with the effect of disclaimers for purposes of Subtitle A. The IRS Chief Counsel’s office has filled the statutory gap, at least with respect to certain disclaimers. GCM 39858 ruled that a disclaimer of retirement benefits, if it meets the requirements of § 2518 and applicable state law, shifts the income tax burden of the benefits from the disclaimant to the person who receives the benefits as a result of the disclaimer. GCM 39858 did not purport to decide the income tax effects of a disclaimer that was either not qualified under § 2518 or not valid under state law. The IRS has at least once treated a nonqualified disclaimer of QRP benefits as effective to transfer the income tax burden of the benefits to the person who took the benefits as a result of the disclaimer. See PLR 9450041. Nevertheless, a nonqualified disclaimer is clearly outside the safe harbor of GCM 39858. There are cases in which “you don’t care,” for gift tax purposes, whether a disclaimer is qualified. See, e.g. , PLR 2005-32024. However, when the disclaimed property is a retirement plan, it is normally vital to have the disclaimer not be treated as an assignment, since assignment of a retirement plan generally results in loss of the income tax-sheltered status of the benefits. ¶ 4.6.03 . The rest of this ¶ 4.4 discusses how the qualified disclaimer requirements apply to disclaimers of retirement benefits. ¶ 4.5 discusses the planning uses (and pitfalls) of qualified disclaimers of retirement benefits. One requirement of a qualified disclaimer is that the disclaimant must not “have accepted the interest disclaimed or any of its benefits.” § 2518(b)(3) . Under Reg. § 25.2518-2(d)(1) , acceptance must involve some action on the part of the beneficiary. Mere passive title-holding is not acceptance. Rather, “Acceptance is manifested by an affirmative act which is consistent with ownership...,” such as accepting “dividends, interest or rent from the property” (Reg. § 25.2518- 2(d)(4) , Examples (6), (11)) or “[D]irecting others to act with respect to the property” (Reg. § 25.2518-2(d)(4) , Example (4)). If a beneficiary causes inherited benefits to be transferred to a different account after the participant’s death ( ¶ 4.2.02 ), that probably constitutes “directing others to act” with respect to the benefits and therefore constitutes acceptance. However, a direction as to only part of the benefits would not necessarily be considered acceptance of the whole; see PLR 2005-03024, in which a surviving spouse exercised control by selling some securities in a joint account that had passed to her by right of survivorship but was not thereby deemed to have accepted the entire account (just the securities she had traded), and was accordingly allowed to disclaim the rest of the account. “[A]cceptance of any consideration in return for making the disclaimer” is treated as acceptance of the property. Reg. § 25.2518-2(d)(1) , last sentence; (d)(4) , Example (2). What constitutes “acceptance” of a retirement benefit