Ohio State Bar Association Council of Delegates Fall 2006 Meeting 13 Report of the Estate Planning, Trust and Probate Section To the Council of Delegates The Estate Planning, Probate, and Trust Law Section recommends to the Council of Delegates the following proposal to amend present section 1339.68 of the Ohio revised Code relating to disclaimers as fully described in this report. The rationale for the amendment and the full text of the proposed amendment are attached as Exhibit A. EXHIBIT A Rationale for amendment: I. INTRODUCTION Respectfully submitted, William F. Bates, Toledo Chair The Ohio Disclaimer Statute is presently Section 1339.68 of the Ohio Revised Code; it was formerly Section 1339.60. It was first adopted in 1976 1 and has been amended several times 2. Recently, the Estate Planning, Trust, and Probate Law Section of the Ohio State Bar Association determined to review this section with the view of clarifying and modernizing its provisions. After this project began, the Legislature passed and the Governor signed the Ohio Trust Code to become effective January 1, 2007. In that Code, Section 1339.68 was renumbered 5815.36. The balance of this memorandum will refer to the new section number. The rationale for the proposed changes follows: One of the important provisions of this Section is paragraph (N), which states that the right to disclaim and the procedures for disclaimer are in addition to, and do not exclude or abridge any other rights or procedures under the Ohio Revised Code or at common law to assign, convey, release, refuse to accept, renounce, waive, or disclaim property. In spite of this provision, many practitioners would assume that a disclaimer made more than nine months after 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 1 136 Ohio Laws SB 168. 2 The most recent amendment is 2002 House Bill 345 (149 Ohio Laws) effective July 23, 2002. Prior amendments are 2000 HB 313 (148 Ohio Laws) effective August 29, 2000, 1998 HB 701 (147 Ohio Laws) effective March 22, 1999.
14 Ohio State Bar Association Council of Delegates Fall 2006 Meeting the relevant date would be ineffective as paragraph (D) of the statute requires the disclaimant to deliver, file or record the disclaimer not later than nine months after the latest of certain dates. Even though it is fair to conclude from paragraph (N) that the whole section was intended to add to and not to subtract from the privileges which a beneficiary would have had prior to the adoption of this Section of the Revised Code, the rigidity of some of the requirements suggest that some aspects of pre-statutory law may have been modified significantly. 3 At least one opinion found a disclaimer of joint and survivorship property invalid because it was delivered to the executor of the deceased joint tenant, and not to the financial institutions holding the joint property. 4 Paragraph (N) may not have much influence in the setting of an audit of an estate tax return or a gift tax return by the Internal Revenue Service. Not only does Section 5815.36 appear to be complete coverage of the law of disclaimer in Ohio, but the Bosch case 5 is a problem because there is no Ohio case law opinion dealing with the meaning of paragraph (N). For purposes of this report, paragraph (N) will be regarded only as an important escape hatch if one is attempting to preserve a disclaimer, refusal or renunciation which would not fit within the rigors of Section 5815.36. The balance of this report is in two major parts: I--Substantive Changes, and II--Clarifications of Existing Law. II. SUBSTANTIVE CHANGES 1. Time for Disclaiming. The Ohio statute is consistent with the qualified disclaimer requirements of Internal Revenue Code Section 2518, particularly with respect to the nine-month requirement. A disclaimer made more than nine months after the relevant date is not qualified under the Internal Revenue Code and is not a disclaimer under the Ohio statute. One substantive change being proposed is to eliminate the nine-month requirement from the Ohio statute. Potential disclaimants in Ohio under the proposal would be able to disclaim under the Ohio statute any time prior to the acceptance of benefits. Whether the disclaimer was qualified under the gift tax law is an independent question to be determined under the Internal Revenue Code. The practicing bar has had sufficient experience with the federal qualified disclaimer statute to permit us to adequately and competently represent clients who are thinking of disclaimer and to permit disclaimers which may be beyond the qualification of the gift tax law. For example, a disclaimer of a property interest which is not capable of valuation, such as a discretionary right to principal, or a testamentary limited power of appointment, would be disclaimable without being a taxable gift even though more than nine months has passed since the interest was created. Also, given the $1,000,000 federal credit equivalent for gifts, permitting a disclaimer more than nine months after the date the interest was created would be desirable, as many non-qualified disclaimed interests will be well within the gift tax credit equivalent. 2. Contingent Interests. By indirection, eliminating the 9-month requirement permits the holder of a contingent remainder (or any other contingent interest) to disclaim whenever the contingency resolves and the interest becomes vested. So that a gift to A for life, remainder to 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 3 See, e.g., Estate of Chamberlin v. Struble, 1982 WL 6445, Ohio App. 6 th Dist. 4 Urban v. Styblo, 1987 WL 9622, Ohio App. 8 th Dist. 5 Commissioner v. Estate of Bosch, 387 US 456 (1967).
Ohio State Bar Association Council of Delegates Fall 2006 Meeting 15 B if living, could be disclaimed by B after A s death and before acceptance of benefits. Under federal gift tax law, the holder of a contingent interest is required to disclaim within nine months after the creation of the interest. 6 The interest holder may be unaware of the existence of the interest at that time. The proposal would permit an Ohio disclaimer to be made prior to the acceptance of benefits, after the disclaimant s interest is vested. Such a disclaimer would be a taxable gift, and if it was capable of valuation, tax would be owing unless sufficient gift tax credit was available. Nevertheless, the recommendation is that such disclaimers be permitted for Ohio law purposes. III. CLARIFICATIONS OF EXISTING LAW 1. Disclaimers by Fiduciaries. The proposal would amend Section 5815.36(A)(1)(c) to state more clearly that when a fiduciary is disclaiming fiduciary rights, privileges, powers, and immunities that a beneficiary s rights may not be disclaimed unless the governing instrument authorizes such treatment. The proposed restated (A)(1)(c) more clearly contrasts with 5815.36 (B)(4) whereby the personal representative of a deceased beneficiary may disclaim that beneficiary s interest. There has been some confusion over whether the personal representative of a deceased beneficiary could disclaim that beneficiary s interest if the will of that beneficiary did not expressly allow a disclaimer. Such interpretation would exclude disclaimers by administrators of intestate beneficiaries, and would make a distinction between wills authorizing disclaimers and wills not authorizing disclaimers. Such a distinction was probably not intended by the Ohio legislature in 1976. The provisions of paragraph (B)(4) preserve the probate court s control over disclaimers made on behalf of deceased persons without regard to the provisions of any will. 2. Definition of Personal Representative. The phrase personal representative is embedded in the statutes of several other states, such as Florida, in referring to a fiduciary appointed by the court or nominated in the will of the decedent for the purpose of administering the estate. In Ohio the word executor is used in most of the provisions of the Revised Code regarding estates. Section 5815.36 uses the phrase personal representative, without any provision defining the term. The proposed change defines personal representative in a new definitional paragraph under paragraph (A)(3) as including any fiduciary defined in Section 2109.01 and any executor, administrator, trustee or guardian. 3. Disposition of Disclaimed Interest. Paragraph (G) allows only for the disclaimant to be treated as predeceasing. When the instrument provides a different disposition, such as a provision in a marital deduction trust that interests disclaimed by the spouse shall pass to the by-pass trust and be disposed of as if the spouse had survived, the existing statute would be inconsistent with that result. The author believes that new paragraph (G)(5) restates existing law and practice. 4. Different Interests Created by One Instrument. New paragraph (Q) clarifies that a disclaimant may disclaim an interest in one trust created by an instrument, without disclaiming an interest created by another trust in the same instrument. Similarly, this provision restates existing law and practice, and precludes any argument (which has been heard in the past) that you must disclaim all interests created in the disclaimant by the instrument. 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 6 Internal Revenue Regs. 25.2518-2(c)(3)(i).
16 Ohio State Bar Association Council of Delegates Fall 2006 Meeting IV. CONCLUSION The New Uniform Act, discussed by Professor Wellman in New Uniform Act on Disclaimers Compared with Earlier Models, 10 PLJO 45 (Mar/Apr 2000), is not considered in this Report. While there is merit to making Ohio s disclaimer law consistent with states adopting the Uniform Act, the author believes that our better course of action at this time is to update the Ohio Disclaimer Law. The proposals set forth in this report would provide Ohioans with a more flexible disclaimer regime. Also, several more-or-less technical issues would be clarified. To preclude debates with the Internal Revenue Service over the proposals for clarification, the Legislature should state that the changes to Section 5815.36(A), (B), (G), (K), (N), and (Q) are restatements of existing law and are not intended to make any substantive change. This would be similar to the uncodified statements of intent which accompany other Code revisions. PROPOSED DISCLAIMER REVISION BILL 5815.36 Disclaimers of successions to property (A) As used in this section: (1) Disclaimant means any person, any guardian or personal representative of a person or estate of a person, or any attorney-in-fact or agent of a person having a general or specific authority to act granted in a written instrument, who is any of the following: (a) With respect to testamentary instruments and intestate succession, an heir, next of kin, devisee, legatee, donee, person succeeding to a disclaimed interest, surviving joint tenant, surviving tenant by the entireties, surviving tenant of a tenancy with a right of survivorship, beneficiary under a testamentary instrument, or person designated to take pursuant to a power of appointment exercised by a testamentary instrument; (b) With respect to nontestamentary instruments, a grantee, donee, person succeeding to a disclaimed interest, surviving joint tenant, surviving tenant by the entireties, surviving tenant of a tenancy with a right of survivorship, beneficiary under a nontestamentary instrument, or person designated to take pursuant to a power of appointment exercised by a nontestamentary instrument; (c) With respect to fiduciary rights, privileges, powers, and immunities, a fiduciary under a testamentary or nontestamentary instrument. This section paragraph does not authorize a fiduciary who is disclaiming fiduciary rights, privileges, powers and immunities to cause disclaim the rights of any beneficiary beneficiaries to be disclaimed unless the instrument creating the fiduciary relationship authorizes the fiduciary to make such a disclaimer. (d) Any person entitled to take an interest in property upon the death of a person or upon the occurrence of any other event. (2) Property means all forms of property, real and personal, tangible and intangible. 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177
Ohio State Bar Association Council of Delegates Fall 2006 Meeting 17 (3) Personal representative includes any fiduciary as defined in section 2109.01 and any executor, trustee, guardian or other person or entity having a fiduciary relationship to any interest in property passing to such fiduciary, executor, trustee, guardian, or such other person or entity by reason of the death of the disclaimant. (B)(1) A disclaimant, other than a fiduciary under an instrument who is not authorized by the instrument to disclaim the interest of a beneficiary, may disclaim, in whole or in part, the succession to any property by executing and by delivering, filing, or recording a written disclaimer instrument in the manner provided in this section. (2) A disclaimant who is a fiduciary under an instrument may disclaim, in whole or in part, any right, power, privilege, or immunity, by executing and by delivering, filing, or recording a written disclaimer instrument in the manner provided in this section. (3) The written instrument of disclaimer shall be signed and acknowledged by the disclaimant and shall contain all of the following: (a) A reference to the donative instrument; (b) A description of the property, part of property, or interest disclaimed, and of any fiduciary right, power, privilege, or immunity disclaimed; (c) A declaration of the disclaimer and its extent. (4) The guardian of the estate of a minor or an incompetent, or the personal representative of a deceased person, whether or not authorized by the instrument to disclaim, with the consent of the probate division of the court of common pleas, may disclaim, in whole or in part, the succession to any property, or interest in property, that the ward, if an adult and competent, or the deceased, if living, might have disclaimed. The guardian or personal representative, or any interested person may file an application with the probate division of the court of common pleas that has jurisdiction of the estate, asking that the court order the guardian or personal representative to execute and deliver, file, or record the disclaimer on behalf of the ward, or estate, or deceased person. The court shall order the guardian or personal representative to execute and deliver, file, or record the disclaimer if the court finds, upon hearing after notice to interested parties and such other persons as the court shall direct, that: (a) It is in the best interests of those interested in the estate of the person and of those who will take the disclaimed interest; (b) It would not materially, adversely affect the minor or incompetent, or the beneficiaries of the estate of the decedent, taking into consideration other available resources and the age, probable life expectancy, physical and mental condition, and present and reasonably anticipated future needs of the minor or incompetent or the beneficiaries of the estate of the decedent. A written instrument of disclaimer ordered by the court under this division shall be executed and be delivered, filed, or recorded within the time and in the manner in which the person could have disclaimed if the person were living, an adult, and competent. 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224
18 Ohio State Bar Association Council of Delegates Fall 2006 Meeting (C) A partial disclaimer of property that is subject to a burdensome interest created by the donative instrument is not effective unless the disclaimed property constitutes a gift that is separate and distinct from undisclaimed gifts. (D) The disclaimant shall deliver, file, or record the disclaimer, or cause the same to be done, at any time prior to accepting any benefits of the interest not later than nine months after the latest of the following dates: (1) The effective date of the donative instrument if both the taker and the taker s interest in the property are finally ascertained on that date; (2) The date of the occurrence of the event upon which both the taker and the taker s interest in the property become finally ascertainable; (3) The date on which the disclaimant attains eighteen twenty-one years of age or is no longer an incompetent, without tendering or repaying any benefit received while the disclaimant was under eighteen twenty-one years of age or an incompetent, and even if a guardian of a minor or incompetent had filed an application pursuant to division (B)(4) of this section and the probate division of the court of common pleas involved did not consent to the guardian executing a disclaimer. (E) No disclaimer instrument is effective under this section if either of the following applies under the terms of the disclaimer instrument: (1) The disclaimant has power to revoke the disclaimer. (2) The disclaimant may transfer, or direct to be transferred, to self the entire legal and equitable ownership of the property subject to the disclaimer instrument. (F)(1) Subject to division (F)(2) of this section, if the interest disclaimed is created by a nontestamentary instrument, the disclaimer instrument shall be delivered personally or by certified mail to the trustee or other person who has legal title to, or possession of, the property disclaimed. (2) If the interest disclaimed is created by a testamentary instrument, by intestate succession, by a transfer on death deed pursuant to section 5302.22 of the Revised Code, or by a certificate of title to a motor vehicle, watercraft, or outboard motor that evidences ownership of the motor vehicle, watercraft, or outboard motor that is transferable on death pursuant to section 2131.13 of the Revised Code, the disclaimer instrument shall be filed in the probate division of the court of common pleas in the county in which proceedings for the administration of the decedent s estate have been commenced, and an executed copy of the disclaimer instrument shall be delivered personally or by certified mail to the personal representative of the decedent s estate. (3) If no proceedings for the administration of the decedent s estate have been commenced, the disclaimer instrument shall be filed in the probate division of the court of common pleas in the county in which proceedings for the administration of the decedent s estate might be commenced according to law. The disclaimer instrument shall be filed and indexed, and fees 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271
Ohio State Bar Association Council of Delegates Fall 2006 Meeting 19 charged, in the same manner as provided by law for an application to be appointed as personal representative to administer the decedent s estate. The disclaimer is effective whether or not proceedings thereafter are commenced to administer the decedent s estate. If proceedings thereafter are commenced for the administration of the decedent s estate, they shall be filed under, or consolidated with, the case number assigned to the disclaimer instrument. (4) If an interest in real estate is disclaimed, an executed copy of the disclaimer instrument also shall be recorded in the office of the recorder of the county in which the real estate is located. The disclaimer instrument shall include a description of the real estate with sufficient certainty to identify it, and shall contain a reference to the record of the instrument that created the interest disclaimed. If title to the real estate is registered under Chapters 5309. and 5310. of the Revised Code, the disclaimer interest shall be entered as a memorial on the last certificate of title. A spouse of a disclaimant has no dower or other interest in the real estate disclaimed. (G) Unless the donative instrument expressly provides that, if there is a disclaimer, there shall not be any acceleration of remainders or other interests, the property, part of property, or interest in property disclaimed, and any future interest that is to take effect in possession or enjoyment at or after the termination of the interest disclaimed, shall descend, be distributed, or otherwise be disposed of, and shall be accelerated, in the following manner: (1) If intestate or testate succession is disclaimed, as if the disclaimant had predeceased the decedent; (2) If the disclaimant is one designated to take pursuant to a power of appointment exercised by a testamentary instrument, as if the disclaimant had predeceased the donee of the power; (3) If the donative instrument is a nontestamentary instrument, as if the disclaimant had died before the effective date of the nontestamentary instrument; (4) If the disclaimer is of a fiduciary right, power, privilege, or immunity, as if the right, power, privilege, or immunity was never in the donative instrument. If the donative instrument expressly provides for a different disposition in the event of a disclaimer, the property or interest in property so disclaimed shall descend, be distributed, or otherwise be disposed of, and shall be accelerated or not, pursuant to such provisions of the donative instrument. (H) A disclaimer pursuant to this section is effective as of, and relates back for all purposes to, the date upon which the taker and the taker s interest have been finally ascertained. (I) A disclaimant who has a present and future interest in property, and disclaims the disclaimant s present interest in whole or in part, is considered to have disclaimed the disclaimant s future interest to the same extent, unless a contrary intention appears in the disclaimer instrument or the donative instrument. A disclaimant is not precluded from receiving, as an alternative taker, a beneficial interest in the property disclaimed, unless a contrary intention appears in the disclaimer instrument or in the donative instrument. 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 307 308 309 310 311 312 313 314 315 316 317
20 Ohio State Bar Association Council of Delegates Fall 2006 Meeting (J) The disclaimant s right to disclaim under this section is barred if, before the expiration of the period within which the disclaimant may disclaim the interest, the disclaimant does any of the following: (1) Assigns, conveys, encumbers, pledges, or transfers, or contracts to assign, convey, encumber, pledge, or transfer, the property or any interest in it; (2) Waives in writing the disclaimant s right to disclaim and executes and delivers, files, or records the waiver in the manner provided in this section for a disclaimer instrument; (3) Accepts the property or an interest in it; (4) Permits or suffers a sale or other disposition of the property pursuant to judicial action against the disclaimant. (K) A fiduciary s application for appointment or assumption of duties as a fiduciary, and a beneficiary s application for appointment as a personal representative or fiduciary, does not waive or bar the disclaimant s right to disclaim a right, power, privilege, or immunity as a personal representative or fiduciary or the right to disclaim property as a beneficiary. (L) The right to disclaim under this section exists irrespective of any limitation on the interest of the disclaimant in the nature of a spendthrift provision or similar restriction. (M) A disclaimer instrument or written waiver of the right to disclaim that has been executed and delivered, filed, or recorded as required by this section is final and binding upon all persons. (N) The right to disclaim and the procedures for disclaimer established by this section are in addition to, and do not exclude or abridge, any other rights or procedures existing or which existed under any other section of the Revised Code or at common law to assign, convey, release, refuse to accept, renounce, waive, or disclaim property. (O)(1) No person is liable for distributing or disposing of property in a manner inconsistent with the terms of a valid disclaimer if the distribution or disposition is otherwise proper and the person has no actual knowledge of the disclaimer. (2) No person is liable for distributing or disposing of property in reliance upon the terms of a disclaimer that is invalid because the right of disclaimer has been waived or barred if the distribution or disposition is otherwise proper and the person has no actual knowledge of the facts that constitute a waiver or bar to the right to disclaim. (P)(1) A disclaimant may disclaim pursuant to this section any interest in property that is in existence on September 27, 1976, if either the interest in the property or the taker of the interest in the property is not finally ascertained on that date. (2) No disclaimer executed pursuant to this section destroys or diminishes an interest in property that exists on September 27, 1976, in any person other than the disclaimant. 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363
Ohio State Bar Association Council of Delegates Fall 2006 Meeting 21 (Q) This section may be applied separately to different interests or powers created in the disclaimant by the same testamentary or nontestamentary instrument. SECTION 2. That existing section 5815.36 of the Revised Code is hereby repealed. SECTION 3. The amendments to sections 5815.36(A), 5815.36(B), 5815.36(G), 5815.36(K), 5815.36(N), and 5815.36(Q) of the Revised Code are declaratory of existing law and shall be construed accordingly. SECTION 4. The Legislature recognizes that federal gift law, namely 26 United States Code Section 2518, defines a qualified disclaimer as one made within nine months of the creation of the interest being disclaimed. By repealing the nine month requirement of former section 5815.36(D) (formerly section 1339.68(D)) of the Revised Code it is the intention of the Legislature to create the possibility that some disclaimers governed by Ohio law will be qualified for United States gift tax purposes, and some will not be so qualified. 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378