Court Opinion

ID: 4474883
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:11.130519+00
Date Added: 2024-06-11T14:53:52.814168
License: Public Domain

Haines and Goeke, JJ., concurring: We join in the majority opinion but write separately to elaborate on why Hamilton’s remainder interest in the trust and the foundation’s 20-year annuity are not severable property for purposes of qualifying the disclaimer with respect to the portion of the disclaimed property that will pass to the trust. Because disclaimers result in gratuitous transfers of property, the gift tax generally applies to transfers resulting from disclaimers. See sec. 2511(a). Section 2518 provides an exception which allows a disclaimant to avoid the second transfer tax for a transfer of an interest in property resulting from a qualified disclaimer. Walshire v. United States, 288 F.3d 342, 349 (8th Cir. 2002). A disclaimer is not a qualified disclaimer if the disclaimant has accepted the interest or any of its benefits, sec. 2518(b)(3), or if the interest passes to the disclaimant and the disclaimant is not the surviving spouse of the decedent, sec. 2518(b)(4). Although section 2518(b)(3) disqualifies a disclaimer if the disclaimant has accepted the interest or any of its benefits, section 2518(c) permits a putative transferee to make a qualified disclaimer of an undivided portion of an interest in property provided the disclaimer meets the requirements of section 2518(b); i.e., a disclaimer of an undivided interest will not be disqualified just because the disclaimant has retained the remaining undivided portion of the property. The transferee, however, is not allowed “to partition the interest bequeathed to him in any manner he chooses” and make a qualified disclaimer of a part of the interest. Walshire v. United States, supra at 347 (a disclaimer of an undivided portion of an interest in property “requires a vertical division of the property”). To do so would ignore the limitation in section 2518(c) that only an “undivided portion” of an interest may be disclaimed. Id. Section 25.2518-3(b), Gift Tax Regs., specifically disqualifies a disclaimer of a remainder interest by the transferee of a fee simple interest. Section 2518 allows a transferee to make a qualified disclaimer only of all or an undivided portion of an interest in property, but it does not require all interests in property given to the transferee to be treated as one interest; e.g., if T devises Blackacre and Whiteacre to A, A may keep Whiteacre and make a qualified disclaimer of Blackacre. Sec. 25.2518-2(e)(5), Example (10), Gift Tax Regs. Section 25.2518-3, Gift Tax Regs., provides guidance in identifying separate interests in property for which qualified disclaimers may be made and allows a transferee of property to make a qualified disclaimer of all or an undivided portion of any separate interest in the property even if the disclaimant has another interest in the same property. Section 25.2518-3(a)(1)(i) and (ii), Gift Tax Regs., recognizes that a transferor may transfer separate interests in the same property (separate transferor-created interests) or an interest in severable property that comprises multiple property interests which may be severed (severable property interests). Generally, each separate transferor-created interest and each severable property interest is treated as a separate property interest. Id. Section 25.2518-3(a)(1)(ii), Gift Tax Regs., defines sever-able property as “property which can be divided into separate parts each of which, after severance, maintains a complete and independent existence.” For example, if under A’s will B is to receive “personal effects consisting of paintings, home furnishings, jewelry, and silver”, B may make a qualified disclaimer of the paintings and retain the furnishings, jewelry, and silver. Sec. 25.2518-3(d), Example (1), Gift Tax Regs. Section 25.2518-3(c), Gift Tax Regs., allows a disclaimer of a specific pecuniary amount to qualify under section 2518. In effect the regulation treats a disclaimer of a specific pecuniary amount as a disclaimer of a severable property interest. The distinction between qualified disclaimers of separate transferor-created interests and qualified disclaimers of severable property is subtle, as shown by the following examples. Assume T devised the income from a farm to A for life, then to B for life, with the remainder interest to A’s estate. A’s life estate and remainder interest in the farm are separate transferor-created interests. A could make a qualified disclaimer of all or an undivided portion of either the income interest or the remainder. See sec. 25.2518-3(a)(1)(i), Gift Tax Regs. Although the life estate and the remainder are separate transferor-created interests, neither is severable property. Thus, A could not make a qualified disclaimer of the income from the property for a term of years. Sec. 25.2518-3(a)(ii), Gift Tax Regs. By contrast, assume T devised a fee simple in the farm to A. Neither a life estate nor a remainder interest in the farm is a separate transferor-created interest, nor are they sever-able property interests. See sec. 25.2518-3(b), Gift Tax Regs. Thus, A could make a qualified disclaimer of all or an undivided portion of the farm but could not retain a life estate and make a qualified disclaimer of the remainder. See id.; see also Walshire v. United States, supra at 349. If the farm consists of 500 acres of land and 500 head of cattle, the farm is severable property with respect to the land and the cattle; i.e., if the cattle are severed from the land, the existence of the cattle will be complete and independent of the land and the existence of the land will be complete and independent of the cattle. Thus, A could retain the land and make a qualified disclaimer of the cattle or retain the cattle and make a qualified disclaimer of the land. Further, the land and the cattle each may be divided into two or more parts, each of which, after severance, would maintain a complete and independent existence. Thus, A could make a qualified disclaimer of 300 identified acres of the 500 acres, see sec. 25.2518-3(d), Example (3), Gift Tax Regs., and a qualified disclaimer of 300 head of the cattle, see id. Example (1). Christensen bequeathed to Hamilton a fee simple in the estate property, and Hamilton disclaimed a pecuniary amount of $3,228,904.98. As a result of Hamilton’s disclaimer, under the terms of Christensen’s will $2,421,671 (75 percent of the pecuniary amount) passes to the trust and $807,233.98 (25 percent of the pecuniary amount) passes to the foundation. Under the terms of the trust, the foundation receives a 20-year annuity, valued at $1,987,515. Both Hamilton and the foundation receive contingent remainders, the values of which total $434,156. Hamilton’s disclaimer is not effective to pass the entire disclaimed property to a person other than herself because she has the right to receive a contingent remainder of the trust by means of Christensen’s will. However, the foundation’s interest in the disclaimed property and the trust’s interest in the disclaimed property are separate undivided interests. Hamilton retains no interest in the amount that passes outright to the foundation. Therefore, Hamilton’s disclaimer is a qualified disclaimer with respect to the $807,233.98 that passes outright to the foundation. Hamilton did not disclaim her right to receive the remainder of the portion of the disclaimed property that passes to the trust. Consequently, the disclaimer is not a qualified disclaimer with respect to Hamilton’s contingent remainder interest. See sec. 25.2518-2(e)(3), Gift Tax Regs. Hamilton’s contingent remainder is an interest in the $2,421,671 portion of the disclaimed property that passes to the trust. That contingent remainder is not an undivided portion of the disclaimed property that passes to the trust. Consequently, unless Hamilton’s remainder interest is a sever-able property interest, her disclaimer is not a qualified disclaimer with respect to the entire interest passing to the trust. See id. In order to be treated as severable property, the foundation’s guaranteed annuity and Hamilton’s remainder, after severance, must maintain “a complete and independent existence.”1 See sec. 25.2518—3(a)(1)(ii), Gift Tax Regs. In the dissenting portion of his opinion, Judge Swift posits that in assessing whether the interests have a separate and independent existence, one key factor is whether each interest, taken separately, has an ascertainable value. Judge Swift quotes the first sentence of section 20.2055-2(a), Estate Tax Regs., which provides: If a trust is created or property is transferred for both a charitable and a private purpose, deduction may be taken of the value of the charitable beneficial interest only insofar as that interest is presently ascertainable, and hence severable from the noncharitable interest. * * * Judge Swift concludes that because the foundation’s annuity interest is presently ascertainable, it is severable from Hamilton’s remainder interest for purposes of qualifying Hamilton’s disclaimer under section 2518. Whether an interest has an ascertainable value is not the proper standard to apply in determining whether that interest is severable for purposes of making qualified disclaimers under section 2518. Indeed, the present values of annuities, life estates, terms of years, remainders, and rever-sionary interests are all ascertainable for purposes of transfer taxes on the basis of recognized valuation principles. See, e.g., sec. 20.2031-7, Estate Tax Regs. The second sentence of section 20.2055-2(a), Estate Tax Regs., following the sentence quoted by Judge Swift, provides: Thus, in the case of decedents dying before January 1, 1970, if money or property is placed in trust to pay the income to an individual during his life, or for a term of years, and then to pay the principal to a charitable organization, the present value of the remainder is deductible. * * * A remainder following a life estate or a term of years is ascertainable and thus “severable” as the term is used in section 20.2055-2(a), Estate Tax Regs. However, a remainder following a life estate or a term of years or an annuity is not severable as the term is used for purposes of determining whether a disclaimer is a qualified disclaimer under section 2518. Sec. 25.2518-3(d), Example (2), Gift Tax Regs. In the dissenting portion of her opinion, Judge Kroupa argues that the foundation’s annuity interest in the trust and Hamilton’s remainder interest in the trust are independent because the foundation can do nothing to affect the contingent remainder and Hamilton can do nothing to affect the annuity. Control by the “holder” of the beneficial interest is not relevant; the holder of the income interest in a trust and the holder of the remainder interest in that trust generally cannot affect each other’s interest; yet those interests are not severable. Although it is possible for the trustee of a trust to affect either the income interest or the remainder through investment decisions, the trustee has a fiduciary duty to balance the interest of the income beneficiary with that of the remainderman in making investment decisions. During the life of the income beneficiary or the term of years, the distribution of the income (usually cash dividends and/or interest) to the income beneficiary does not diminish the value of the remainder interest. Similarly, the gain or loss that might accrue in the corpus is not affected by the income earned and distributed to the income beneficiary. Essentially, the income beneficiary gets the fruit during his life or term, and the remainderman gets the tree at the end of the life or term. By contrast, where the present interest is a fixed annuity, the annuitant may receive only income, only corpus, or a combination of income and corpus, depending on the amount of income, if any, the trust investments have produced. Furthermore, that mixture may change in any given year. The value of the annuity is computed on the assumption that the trust assets will produce income equal to an assumed interest rate. See sec. 20.203l-7(d)(2)(iv)(A), Estate Tax Regs. The fixed annual payment may be greater than or less than the anticipated income. In the event the investments produce less income than expected, the corpus of the trust may be depleted beyond the expectations of the parties, reducing the value of the remainder interest. Conversely, in the event the investments produce more income than expected, the corpus of the trust may grow beyond the expectations of the parties, increasing the value of the remainder. In this way, the remainder is entirely dependent on the annuity in that it is affected by the amounts distributed to the annuitant, and by the source of those distributions, either from income or corpus. In contrast, a remainder interest is less dependent on an income interest as the payments to the income beneficiary will never include corpus. Thus, an annuity interest and a remainder interest are more dependent on each other than an income interest and a remainder interest. While the values of an annuity interest and a remainder interest may be ascertained, if separated they do not maintain a complete and independent existence in the way that 300 head of cattle are independent of the remaining 200. Therefore, the annuity interest and the remainder interest are not severable within the meaning of section 25.2518-3(a)(1)(ii), Gift Tax Regs. Section 25.2518 — 2(e)(3), Gift Tax Regs., provides that if the portion of the disclaimed property which the disclaimant has a right to receive (Hamilton’s remainder interest) is not severable property or an undivided portion of property, the disclaimer is not qualified with respect to any portion of the property (the $2,421,671 that passes to the trust). As explained above, Hamilton’s remainder interest is not sever-able property or an undivided portion of property. Therefore, the disclaimer is not a qualified disclaimer with respect to the $2,421,671 passing to the trust. Cohen, Foley, Thornton, Marvel, Wherry, and Holmes, JJ., agree with this concurring opinion.   “[I]ndependent” is defined as: “not requiring or relying on something else (as for existence, operation, efficiency): not contingent: not conditioned”. Webster’s Third New International Dictionary 1148 (2002).