In Breakiron v. Gudonis, Case No. 09-10427-RWZ, 2010
U.S. Dist. LEXIS 80888 (Aug. 10, 2010), the United States District
Court for the District of Massachusetts addressed issues concerning
the disclaimer of an interest in a trust.
The plaintiff's parents established two qualified personal
residence trusts (QPRT) for their one-half interests in their
Nantucket property. At the expiration of the ten-year term of the
QPRTs, the property passed to the plaintiff and his sister as
tenants in common. The plaintiff then consulted with an attorney
about the proper way to transfer his interest to his sister while
incurring the lowest possible transfer tax. The attorney told the
plaintiff to disclaim his interest in the QPRTs, incorrectly
advising him that the disclaimers would be valid if executed within
nine months after the expiration of the term of the QPRTs, rather
than within nine months after the creation of the QPRTs.
Upon learning that the disclaimers were ineffective to avoid the
imposition of a gift tax on the transfer, the plaintiff filed suit
to rescind his disclaimers. The federal government argued in
opposition that the gift tax became due and owing once the invalid
disclaimers were executed and that rescission would not relieve the
plaintiff of his obligation to pay the gift tax.
The court held that the plaintiff was entitled to rescind the
disclaimers, because his execution of the disclaimers was based on
his mistaken belief that they would allow him to achieve his
intended goal of minimizing taxes. Accordingly, the court reformed
the disclaimers "nunc pro tunc," treating them as if they
had never been executed and thus treating the gift as if it had
never been made. Whether this reformation of the disclaimers would
relieve the plaintiff of his gift tax liability presented a more
complicated question. After discussing at length the division of
authority on this issue, the court held that reformation of the
disclaimers is conclusive for federal tax purposes
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