In this case, a disclaimant’s parents set up Qualified Personal Resident Trusts (“QPRTs”) that passed to the disclaimant, Craig, and his sister after the QPRT terms expired. Craig wanted to transfer his interest in the QPRTs to his sister and consulted with an attorney on the gift tax implications. The attorney incorrectly advised Craig that he could make a qualified disclaimer as long as he completed it within 9 months of the expiration of the QPRTs’ terms. However, the disclaimer actually had to be completed within 9 months from the creation of the QPRTs. Due to the error the disclaimer was unqualified and Craig owed $2.5 million of gift tax liability.
Craig tried to rescind the disclaimer under the applicable state law (Massachusetts) and named the IRS as a party to the suit. Massachusetts law allows a written instrument to be rescinded on the grounds of mistake when there is full, clear, and decisive proof of the mistake. Massachusetts case law also has specifically recognized that a disclaimer may be rescinded if it was executed because of a mistake which frustrated its purpose.
The Court found that since the IRS was named as a party to the case and because the disclaimers were rescindable under the applicable state law, the disclaimers should be rescinded and no gift tax imposed.