3.4 Disclaimer as Transfer
For most purposes, a disclaimer should not be a transfer for fraudulent conveyance purposes under Maryland law. Given the asset protection benefits afforded married couples by tenancy by the entireties, if a disclaimer is not a transfer a planning opportunity exists. A couple could hold most of their assets by the entities then rely on a “disclaimer trust” with a spendthrift clause at the first death. If the debtor spouse dies first, the asset is received (in general, see below) free of the debts. If the debtor spouse survives and a disclaimer is not a transfer, then at least part of the entireties property could be “directed” to a spendthrift trust for the benefit of the survivor. Obviously, the key issue to this planning is whether a disclaimer is a transfer for fraudulent conveyance purposes.
Maryland has adopted the 2002 version of the Uniform Disclaimer of Property Interest Act. It states that “a disclaimer made under this subtitle is not a transfer, assignment, or release.” Est. & Trusts § 9-202(f). This language is meant to continue the “relation back” effect of prior law:
“Subsection (f) restates the long standing rule that a disclaimer is a true refusal to accept and not an act by which the disclaimant transfers, assigns, or releases the disclaimed interest. This subsection states the effect and meaning of the traditional “relation back” doctrine of prior Acts. It also makes is clear that the disclaimed interest passes without direction by the disclaimant, a requirement of tax qualification.”
Comment, Section 6, UDPIA (2002).
Effective October 1, 2007, Est. & Trusts § 9-202(f)(2) was added to provide: “Creditors of the disclaimant have no interest in the property disclaimed.” This should preclude most (but as discussed below, perhaps not all) creditors from reaching disclaimed assets.
The declaration that a disclaimer is not a transfer is not absolute. In Troy v. Hart, 116 Md. App. 468, 697 A.2d 113 (1997); cert. denied 347 Md. 255, 700 A.2d 1215 (1997) the court held under the prior law that an inheritance disclaimed is subject to a constructive trust in order to disgorge the disclaimant’s Medicaid benefits. This decision was grounded in public policy:
“What this Court is more broadly faced with is the propriety of the disclaimer in light of societal interest and overall policy considerations. What is ludicrous, if not repugnant, to public policy is that one who is able to regain the ability to be financially self-sufficient, albeit for a temporary or even brief period of time, may voluntarily relinquish his windfall.
While we are mindful that social agencies are ‘skewered through and through with office pens, and bound hand and foot with red tape,’ this acknowledgment does not vitiate legal obligation to report a recipient’s change in financial status. Lettich had a legal obligation to ‘pay his own way’ (by means of the inheritance) until such time as his resources were exhausted. Had the disclaimed funds actually been acquired and exhausted, Lettich most certainly would have been eligible to resume his receipt of Medicaid benefits.
In Molloy v. Bank, 214 A.D.2d 171, 631 N.Y.S.2d 910 (1995), the Supreme Court of New York, Appellate Division, confronted the same issue now before this Court. Molloy, a resident of a nursing home, was a recipient of medical assistance. Upon the death of her daughter, Molloy, pursuant to intestacy law, was entitled to her statutory share of the estate. Prior to disposition of the estate, Molloy renounced her interest in it. Acknowledging that the right to renounce a intestate is irreconcilable with the principle that public aid is of a limited nature and should only be afforded to those who demonstrate legitimate need, 631 N.Y.S.2d at 911, the court found that ‘[Molloy]’s renunciation of a potentially available asset was the functional equivalent of a transfer of an asset since by refusing to accept it herself, she effectively funneled it to other familial distributes.’ Id. at 913.
Applying this analysis to the case sub judice, we adopt the reasoning of the New York court. The result of such a transfer prior to application for benefits is that the transferee enjoys a ‘windfall’ for which the applicant/transferor is penalized against the inception of his eligibility. So too should this penalty result in a circumstance in which a Medicaid recipient disclaims or otherwise transfers an inheritance that if accepted would result in a loss of eligibility.”
Although the Troy Court adopts the New York approach that a disclaimer is “the functional equivalent of a transfer,” it appears to adopt this position only for the purposes of determining whether an applicant has an “available resource” for benefit qualification purposes. That determination is worlds away from treating a disclaimer as a transfer, fraudulent or otherwise. For a discussion of the different treatment afforded in various jurisdictions of whether a disclaimer can be a fraudulent conveyance, see generally Fred Franke, Asset Protection and Tenancy by the Entirety, 34 ACTEC J. 210, 219-21 (2009).
Under federal law, a disclaimer will not defeat a federal tax lien. This decision turned (like Craft, discussed below) on a federal definition of whether property interests constitute “property” or “rights to property” under IRC § 6321. Drye v. United States, 528 U.S. 49, 120 S.Ct. 474 (1999):
“In sum, in determining whether a federal taxpayer’s state-law rights constitute ‘property’ or ‘rights to property,’ ‘[t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property.’ Morgan, 309 U.S., at 83. Drye had the unqualified right to receive the entire value of his mother’s estate (less administrative expenses), see National Bank of Commerce, 472 U.S., at 725 (confirming that unqualified ‘right to receive property is itself a property right’ subject to the tax collector’s levy), or to channel that value to his daughter. The control rein he held under state law, we hold, rendered the inheritance ‘property’ or ‘rights to property’ belonging to him within the meaning of § 6321, and hence subject to the federal tax liens that sparked this controversy.”
Whether disclaimers work beyond the Troy and Drye situations is not fully decided in Maryland. The literal language of Est. & Trusts § 9-202(f), of course, may define the state of the law. This provision flatly denies a creditor’s claim to disclaimed property. Est. & Trusts § 9-210(e), however, states that disclaimers are barred or limited if “so provided by law other than this subtitle.” As discussed in the Comment to the Uniform Act (at Section 13), ultimately the issue is left to the legislature or to the courts:
“Subsection (e), unlike the 1978 Act, specifies that ‘other law’ may bar the right to disclaim. Some States, including Minnesota (M.S.A. § 525.532 (c)(6)), Massachusetts (Mass. Gen. Law c. 191A, § 8), and Florida (Fla. Stat. § 732.801(6)), bar a disclaimer by an insolvent disclaimant. In others a disclaimer by an insolvent debtor is treated as a fraudulent ‘transfer’.See Stein v. Brown, 18 Ohio St.3d 305 (1985); Pennington v. Bigham, 512 So.2d 1344 (Ala. 1987). A number of States refuse to recognize a disclaimer used to qualify the disclaimant for Medicaid or other public assistance. These decisions often rely on the definition of ‘transfer’ in the federal Medical Assistance Handbook which includes a ‘waiver’ of the right to receive an inheritance (see 42 U.S.C.A. § 1396p(e)(1)). See Hinschberger v. Griggs County Social Services, 499 N.W.2d 876 (N.D. 1993); Department of Income Maintenance v. Watts, 211 Conn. 323 (1989), Matter of Keuning, 190 A.D.2d 1033, 593 N.Y.S.2d 653 (4th Dept. 1993), and Matter of Molloy, 214 A.D.2d 171, 631 N.Y.S.2d 910 (2nd Dept. 1995),Troy v. Hart, 116 Md. App. 468, 697 A.2d 113 (1997), Tannler v. Wisconsin Dept. of Health & Social Services, 211 Wis. 2d 179, 564 N.W.2d 735 (1997); but see, Estate of Kirk, 591 N.W.2d 630 (Iowa, 1999) (valid disclaimer by executor of surviving spouse who as Medicaid beneficiary prevents recovery by Medicaid authorities). It is also likely that state policies will begin to address the question of disclaimers of real property on which an environmental hazard is located in order to avoid saddling the State, as title holder of last resort, with the resulting liability, although the need for fiduciaries to disclaim property subject to environmental liability has probably been diminished by the 1996 amendments to CERCLA by the asset Conservation Act of 1996 (PL 104-208). These larger policy issues are not addressed in this Act and must, therefore, continue to be addressed by the States. On the federal level, the United States Supreme Court has held that a valid disclaimer does not defeat a federal tax lien levied under IRC § 6321, Drye, Jr. v. United States, 528 U.S. 49, 120 S.Crt. 474 (1999).”
Under current law, the only exceptions to the “no-transfer” rule impacting Marylanders are those of the Troy and Drye situations. Thus, a disclaimer trust should work in other circumstances.