Estate Planning

Disclaimers can Protect Assets in Bankruptcy

By Gregory Herman-Giddens

In a case interpreting Arizona law, the Court of Appeals for the Ninth Circuit held in Gaughan v. Costas that a disclaimer filed prior to declaring bankruptcy was valid and effective since the disclaimer was permitted under state law.  In re Costas, 555 F.3d 790 (9th Cir. 2009).  The effect of the ruling is that federal courts must examine state law definitions of property to determine whether a disclaimer of an interest in a trust or estate constitutes a fraudulent transfer under the Bankruptcy Code.

In Costas, the court's decision meant that because the debtor had disclaimed her inheritance before filing for personal bankruptcy, her family members rather than her creditors were able to recieve the money her father had left for her.   Check out this Trusts and Estates article discussing the case.

North Carolina falls under the jurisdiction of the Fourth Circuit Court of Appeals, so this ruling does not automatically apply to bankruptcies in this state.  The NC law on disclaimers (called renunciations in NC) provides that a renunciation valid under federal law means that the renouncer is treated as having predeceased the date of the transfer (generally the death of the person from whom the renouncer would inherit). 

Federal disclaimer law provides, inter alia, that the disclaimer must be made within nine months of the date of  death of the transferor and without accepting benefits from or asserting control over the disclaimed property interest. IRC 2518.

I have yet not researched NC case law, but based on the wording on the NC statute (click "Continue Reading), I think the Fourth Circuit could reach the same conclusion.

§ 31B?3. Effect of renunciation.

(a) Unless the decedent, donee of a power of appointment, or creator of an interest under an inter vivos instrument has otherwise provided in the instrument creating the interest, the property or interest renounced devolves as follows:

(1) If the renunciation is filed within the time period described in G.S. 31B?2(a), the property or interest renounced devolves as if the renouncer had predeceased the date the transfer of the renounced interest to the renouncer was complete for federal and State inheritance, estate, and gift tax purposes, or, in the case of the renunciation of a fiduciary right, power, privilege, or immunity, the property or interest subject to the power devolves as if the fiduciary right, power, privilege, or immunity never existed. Any such renunciation relates back for all purposes to the date the transfer of the renounced interest to the renouncer was complete for the purpose of those taxes.

Full post as published by North Carolina Estate Planning Blog on September 24, 2009 (boomark / email).