SOME DISCLAIMER DOCTRINES YOU MAY NOT KNOW MUCH ABOUT

As a general rule, a disclaimer of property by a recipient results in the property passing under state law or an applicable instrument as if the disclaimant predeceased the transfer to him or her. A recent article discusses two legal doctrines that may apply, if the disclaimed interest is a current  income interest in a trust or a life estate in property. These two doctrines are not well known. Let’s see how these apply in the circumstances of a life income beneficiary of a trust disclaiming his or her income interest.

DOCTRINE OF ACCELERATION. This doctrine provides that if a prior interest is renounced or disclaimed (here, a current income interest), succeeding interests are accelerated, except when the circumstances manifest a contrary intent. Normally, then, when the lifetime interest holder disclaims, the remaindermen immediately succeed to the interest provided for them in the trust that would arise at the normal termination of the lifetime interest (e.g., based on what would occur at the death of the lifetime interest holder).

A circumstance when the succeeding interest may not be accelerated under the doctrine is a life estate to Steve, remainder to Karen, but if Karen is not then living, to George. In normal circumstances Karen would not be entitled to the property unless she survived Steve. If the determination date is moved up, George is eliminated even though Karen may not in fact survive Steve. Some courts may determine it inappropriate to accelerate Karen’s interest and thus cut out George just because Steve disclaimed his interest.

DOCTRINE OF THE NEXT EVENTUAL ESTATE. It is possible that with a disclaimer there is a gap in identifying who is entitled to income. For example, assume a trust provides that Steve is entitled to the income for life, and Karen gets the remainder after Steve’s death but not before she attains age 21. Steve disclaims his interest. Assume that under the Doctrine of Acceleration, Karen’s interest in the income is not accelerated.

There is now a gap as to who receives the income. Possible answers include the grantor of the trust, intestate takers, the residuary legatee, or perhaps the income is accumulated until Karen is 21. The Doctrine of the Next Eventual Estate, when applicable, generally provides that when income is not disposed of and there is no direction for its accumulation, it would pass to the persons entitled to the next eventual estate. Thus, in those states where the Doctrine is applicable, Karen would be entitled to the income after Steve’s disclaimer even if she was not yet 21.

STATE LAW. The application of these doctrines is state specific, and they are often incorporated into state property law statutes. In any case, they should be within the knowledge and lexicon of estate planners.

Unintended Effects of Disclaimers of Income Interests, by Jay A. Soled and Mitchell Gans, WG&L Estate Planning Journal, May 2012