In re Estate of Holden

• Decision Date: 27 November 2000
• Docket Number: No. 25215.,25215.
• Citation: 343 S.C. 267,539 S.E.2d 703
• Parties: In the Matter of the ESTATE OF William D. HOLDEN, Sr. William D. Holden, Jr., as Personal Representative for the Estate of William D. Holden, Sr., Petitioner, v. Zachary David Holden and Julia Lynn Holden, Minors, through their Guardian ad litem, Allan E. Fulmer, Jr., Respondents.
• Court: South Carolina Supreme Court

343 S.C. 267

539 S.E.2d 703

In the Matter of the ESTATE OF William D. HOLDEN, Sr.

William D. Holden, Jr., as Personal Representative for the Estate of William D. Holden, Sr., Petitioner, v. Zachary David Holden and Julia Lynn Holden, Minors, through their Guardian ad litem, Allan E. Fulmer, Jr., Respondents.

No. 25215.

Supreme Court of South Carolina.

Heard October 31, 2000.

Decided November 27, 2000.

Daniel K. Felker of Law Offices of Daniel K. Felker, of Columbia, for petitioner.

James B. Richardson, Jr., of Richardson & Birdsong, and Allan E. Fulmer, Jr., of Columbia, for respondents.

BURNETT, Justice:

This is a probate matter involving the validity of two disclaimers of interest in an estate and the validity of two documents revoking the disclaimers. The decision of the Court of Appeals is affirmed as modified.

FACTS

William Holden, Sr., (Father) died intestate on January 3, 1992. He was survived by his wife Julia S. Holden (Mother), two sons Petitioner William Holden, Jr., and Robert Holden (Sons), and one grandchild. A second grandchild was born within ten months of Father's death.

After Father's death, Sons filed disclaimers of their interests in Father's estate. In relevant part, the disclaimers state: "I hereby disclaim and renounce any interest in the estate and relinquish any claim I may have to it." Their attorney's letter accompanying the filing describes the disclaimers as "Disclaimers of the decedent's children in favor of the decedent's spouse." The personal representative subsequently distributed the proceeds of the estate to Mother.

After reviewing the estate's closing documents, the probate court informed the personal representative that, as a result of Sons' disclaimers, Respondents Zachary David Holden and Julia Lynn Holden (Grandchildren), as Father's lineal descendants, may inherit a portion of the estate.¹ To avoid this unintended result, each Son executed a document entitled "Revocation and Withdrawal of Disclaimer" which provides, in part: "... [i]t was my intent in entering into this said Disclaimer and Renunciation of Interest to disclaim and renounce my intestate interest in favor of [Mother] ... the spouse of [Father], so that she would become the sole heir of the Estate; ...".²

The probate court appointed a guardian ad litem for Grandchildren and conducted a hearing to determine the validity of the disclaimers and revocations. The probate court held Sons' disclaimers were valid for federal tax law purposes and the revocations were ineffective. The court ordered 50% of the estate's assets distributed to Grandchildren.

The circuit court held the attorney's filing letter accompanying the disclaimers expressly provided Sons intended to direct their interest in the estate to their Mother. Concluding this intention was contrary to applicable provisions of the Internal Revenue Code, the circuit court held the disclaimers ineffective. In a two to one decision, the Court of Appeals held the disclaimers were valid and reversed the circuit court. Estate of Holden v. Holden, 336 S.C. 456, 520 S.E.2d 322 (Ct.App. 1999).

ISSUES

I. Did the Court of Appeals err by determining Sons filed valid disclaimers of their interest in their Father's estate?

II. Did the Court of Appeals err by failing to rule on Sons' additional sustaining ground that Sons effectively revoked their disclaimers?

III. Did the Court of Appeals err by refusing to apply equity principles to set aside the disclaimers?

DISCUSSION

The General Assembly established the statutory scheme for the disclaimer of property interests in South Carolina. Pate v. Ford, 297 S.C. 294, 376 S.E.2d 775 (1989) (discussing the predecessor statute to § 62-2-801). To disclaim an interest in property, a transferee must comply with that scheme. In the Matter of Will of Hall, 318 S.C. 188, 456 S.E.2d 439 (Ct.App. 1995). The General Assembly stated its intent in enacting the statutory scheme for disclaimers as follows:

to clarify the laws of this State with respect to the subject matter hereof in order to ensure the ability of persons to disclaim interests in property without the imposition of federal and state estate, inheritance, gift, and transfer taxes.

This provision is to be interpreted and construed in accordance with, and in furtherance of, that intent.

S.C.Code Ann. § 62-2-801(f) (1987).

Under the probate code, a person may disclaim an inheritance as follows:

In addition to any methods available under the existing law, statutory or otherwise, if a person ..., as a disclaimant, makes a disclaimer as defined in § 12-16-1910 of the 1976 Code, with respect to any transferor's transfer (including transfers by ... intestacy... ) to him of any interest in ... property, ... the interest ... is considered never to have been transferred to the disclaimant.

S.C.Code Ann. § 62-2-801(a) (Supp.1999).

Section 12-16-1910 addresses the effect of a disclaimer of property interests for purposes of estate taxes. It provides "if a person as defined in Section 62-2-801 makes a disclaimer as provided in Internal Revenue Code Section 2518 with respect to any interest in property, this chapter applies as if the interest had never been transferred to the person." § 12-16-1910 (Supp.1999).

In relevant part, Internal Revenue Code § 2518 defines a "qualified disclaimer" for purposes of federal estate and gift tax laws as follows:

(a) General rule.—For purposes of this subtitle, if a person makes a qualified disclaimer with respect to any interest in property, this subtitle shall apply with respect to such interest as if the interest had never been transferred to such person.

(b) Qualified disclaimer defined.—For purposes of subsection (a), the term "qualified disclaimer" means an irrevocable and unqualified refusal by a person to accept an interest in property but only if—

(1) such refusal is in writing,

...

(3) [the disclaimant] has not accepted the interest or any of its benefits, and

(4) as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either— (A) to the spouse of the decedent, or

(B) to a person other than the person making the disclaimer.

26 U.S.C.A. § 2518 (1989) (underline added).

A United States Treasury Department regulation interprets Internal Revenue Code § 2518(b)(4) as follows:

Passage without direction by the disclaimant of beneficial enjoyment of disclaimed interest—(1) In general. A disclaimer is not a qualified disclaimer unless the disclaimed interest passes without any direction on the part of the disclaimant to a person other than the disclaimant ... If there is an express or implied agreement that the disclaimed interest in property is to be given or bequeathed to a person specified by the disclaimant, the disclaimant shall be treated as directing the transfer of the property interest.

26 C.F.R. § 25.2518-2(e)(1) (1998).³

"The requirement that the disclaimed property pass "without any direction" from the person making the disclaimer means that the disclaimer must result in a valid passing of the disclaimed interest ... by operation of state law." DePaoli v. Comm'r, 62 F.3d 1259, 1260-61 (10th Cir.1995); see Estate of Lute v. U.S., 19 F.Supp.2d 1047 (D.Neb.1998); Estate of Gorre v. Comm'r, T.C. Memo. 1994-331, 1994 WL 379246 (1994). The "without any direction" requirement is satisfied "only if the interest passes to the ultimate recipient by virtue of the instrument of transfer or by operation of law; it prevents the disclaimant from designating a beneficiary." 5 Boris I. Bittker and Lawrence Lokken Federal Taxation of Income, Estates & Gifts § 121.7.6 (2nd ed.1993); see In re Estate of Lyng, 608 N.W.2d 316 (S.D.2000) (by directing the destination of attempted disclaimed assets, the alleged disclaimant demonstrates acceptance rather than rejection of the property).

In addition, a qualified disclaimer must also meet any state law requirements. Delaune v. U.S., 143 F.3d 995, 1001 (5th Cir.1998) ("[T]he clear terms of § 2518(b)(4) necessarily require the disclaimer itself be valid under state law, because only in such a situation can it be said that the interest passes `as a result of the refusal' and `without any direction on the part of the person making the disclaimer'."); Estate of Bennett, 100 T.C. 42, 67, 1993 WL 19583 (1993) ("[T]here must be a valid passing of an interest under State law requirements before a valid passing of an interest can be considered to have occurred for Federal estate tax law purposes.");⁴see United States v. Irvine, 511 U.S. 224, 237-38, 114 S.Ct. 1473, 128 L.Ed.2d 168 (1994) ("... although state law creates legal interests and rights in property, federal law determines whether and to what extent those interests will be taxed.").

I.

Sons argue the Court of Appeals erred by holding their disclaimers met the requirements of qualified disclaimers under I.R.C. § 2518(b)(4). Specifically, Sons argue their intention to direct their interests is apparent from 1) their attorney's filing letter accompanying the disclaimers, 2) the fact that two of the three heirs disclaimed their interest, indicating an intent to direct the disclaimed interest in favor of the third heir, and 3) their revocations once they realized the disclaimers might not transfer their interests to Mother. They assert each of these factors suggest an implied agreement to disclaim their interests in favor of Mother, that parol evidence of these factors was properly admitted without objection before the probate court, and that their disclaimers are ineffective. We disagree.

A.

"The parol evidence rule prevents the introduction of extrinsic evidence of agreements or understandings contemporaneous with or prior to execution of a written instrument when the extrinsic evidence is to be used to contradict, vary or explain the written instrument." Gilliland v. Elmwood Properties, 301 S.C. 295, 302, 391 S.E.2d 577, 581 (1990). Where a written instrument is...