Handling of Disclaimer of inherited Real property

[fpc]

I submitted a Qualified Disclaimer to the Executor of a Will to relinquish my rights to the inheritance of real property (a house and the land on which it is on) in Mississippi.  There was no Trust involved.

I submitted the Qualified Disclaimer form 14 months after the death of the testator.  So I missed the 9-month deadline.

I know there is an IRS consequence, but I don't know what form(s) to complete.  It seems IRS section 2518 is involved. But I did not find what appears to be an appropriate form in TurboTax Home and Business.

Help appreciated.  Thank you

[tagteam]

You should consult with a legal professional in the state in which the property is located (Mississippi) since there may be liability issues.

See https://www.avvo.com

Otherwise, there are really no federal tax consequences (beyond any income generated by the property) beyond having the property included in your estate.

[fpc]

Through research, I've learned that disclaiming inheritance results in the effect of a gift given to the heir(s) that ends up receiving the share you would have received.  So it seems a form 709 would be completed with the "gift" shown to being given to heir(s) who have not disclaimed their portion by the close of Probate or final closure of the property transfer.  After probate, if an heir wants to give/sell their portion, a quit claim deed would be prepared.  Then I don't know: either capital gains would be declared or handled as a gift ... (?)  

I haven't looked at the form 709 to check whether or not an area is set aside for disclaimers.  But I won't be surprised if such a field is not there.

Thank you!

[tagteam]

A qualified disclaimer results in you being treated as if you had predeceased the testator. 

As a result, no gift tax return would be required. 

[fpc]

Well, I had understood that to be the case if the Disclaimer was filed within 9 months of the death of the testator.  But now it has been a year.  In Mississippi, there is no deadline due to a change in the state law July, 2020.  But the nine month deadline still exists for the IRS.

So ...  I had understood the price to be paid for waiting would be the requirement to include the 'gift' as a p/o your lifetime exclusion (less $15,000??) and be entered on the 709.

Do you think that to be incorrect?

Thank you for your expertise !

[tagteam]

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@fpc wrote:

....I had understood the price to be paid for waiting would be the requirement to include the 'gift' as a p/o your lifetime exclusion (less $15,000??) and be entered on the 709.

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That may very well be the case, but how did you come to understand that? 

I simply cannot find any statutory authority for that proposition nor any guidance from a regulatory agency.

[fpc]

Well, I believe I read that in an IRS publication, but I can't find it now.  After I posted that question here, I read two other posts in another forum as follows (Note for both posts:  There are 5 siblings.  Four of the five are filing disclaimers which will leave the entire estate to the fifth):

"Congress wrote in the 9 month limit for disclaimers because it wanted a national standard for what would count as a disclaimer for federal gift tax purposes rather than relying on state law, which would create 50 different rules for what is effective for a disclaimer. So the federal rule is that the disclaimer must work under state law but also imposes some additional requirements, in particular the nine month requirement. By the way, that nine month period was not chosen arbitrarily. It was chosen because nine months after death is also the deadline for the estate to file its estate tax return, and the estate would need to know what disclaimers are being made to prepare that return.

The effect of missing the nine month deadline here is that each beneficiary making the disclaimer is treated as making a gift to the fifth sibling in the amount of the value of the share of the property that is being transferred. It is exactly the same tax result that would occur if the four siblings did quit claim deeds rather than disclaimers."

Here is 2nd post:

"A, B, C, D, and E each have a 1/5 interest in the value of the property.  When A, B, C, and D disclaim their inheritance, each 1/5 is a gift to E for IRS purposes. A, B, C, and D would each have to file a gift tax return showing the amount that each has gifted to E. "

Thank you for your help!

[tagteam]

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@fpc wrote:

The effect of missing the nine month deadline here is that each beneficiary making the disclaimer is treated as making a gift to the fifth sibling in the amount of the value of the share of the property that is being transferred. It is exactly the same tax result that would occur if the four siblings did quit claim deeds rather than disclaimers."

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I would interpret current federal law as stating that a missed deadline is tantamount to not having filed a valid disclaimer (note the term "qualified disclaimer" is used in the statute). 

As a result, the interest would vest in the beneficiary(ies) without a qualified disclaimer. Obviously, each beneficiary would then be free to gift the interest the beneficiary acquired to any third party and, if over the annual exclusion, would be required to file a gift tax return.

[fpc]

I looked in the instructions for the 709.  Qualified Disclaimers are covered there.  The 9-month deadline is mentioned.  But no remedy is covered if the deadline was missed.  One paragraph states:

"The 9-month period for making the disclaimer is generally determined separately for each taxable transfer. For gifts, the period begins on the date the transfer is a completed transfer for gift tax purposes."

Seems that the instructions would have been an appropriate place to state what happens when the 9 month period is missed.  I suppose, in absence of a remedy, it is inferred that the Qualified Disclaimer rule does not apply and therefore the the surrender of the inherited property is considered to be a gift.

??

[tagteam]

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@fpc wrote:

Seems that the instructions would have been an appropriate place to state what happens when the 9 month period is missed. 

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Exactly and, without more, the interest would simply vest as per the testamentary document.

[fpc]

You and I submitted posts at the same time.

Your interpretation makes sense to me.  In my layman terms -- If you fail to take advantage of the Qualified Disclaimer, the property becomes yours and if you elect to surrender it, you do so as a gift.  Fortunately, the state allows you to surrender the property by leaving it in the Will so that you do not have to file a Quit Claim Deed.

One additional question I have is whether a married couple could take advantage of a $30k exclusion for the inherited property.  I would guess only a $15k exclusion would be available since only one person of the two actually inherited the property.

Thank you for helping with my understanding of this.

[fpc]

Yeah!

So again, luckily, Mississippi eliminated the deadline and therefore eliminated the need for Quit Claim Deeds in a case like this.

Thanks!

[tagteam]

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@fpc wrote:

One additional question I have is whether a married couple could take advantage of a $30k exclusion for the inherited property.  I would guess only a $15k exclusion would be available since only one person of the two actually inherited the property.

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Inherited property is typically separate property in the context of a marriage, but the Code does allow for unlimited gifts to a spouse (so you could make a gift of half of the property to your spouse prior to gifting it to a third party).

Note that you might have to wait a certain amount of time to avoid the step transaction doctrine.

[fpc]

Interesting.

But in order to do that, I would have to take "possession" (no qualified disclaimer) of the inheritance then quit claim deed half of my interest to my wife.  Then each of us would quit claim deed our halves to the 3rd party.   I would miss out on the state qualified disclaimer....  So I'd have to pay for the filing of three quit claim deeds.

🙂

I'll have to look up Step transaction doctrine.  I assume that indicates that you don't do all three QCD at one time.  🙂  Edit:  I just read about it.  The doctrine makes sense!

Or are you thinking of a much simpler approach?  

[tagteam]

@fpc 

What, exactly, is the goal here? Do you want the property to go to a relative for that relative's own personal use (or some other use but still owned by the relative/donee)?

Otherwise, you could sell the property (reduce it to cash) and simply make a deposit in a joint bank account with your wife. Thereafter, you could gift cash to the donee, either in full or within the annual exclusion.

There are most likely other strategies available but the objective is unclear.