Underwriting Q&A: What is the effect of a disclaimer of interest in property? (TX)

A: A disclaimer may be used for a variety of reasons including federal tax purposes (avoid gift taxes) and other state law purposes (avoid creditors’ claims). In Texas, disclaimers are governed by the Texas Uniform Disclaimer of Property Interest Act (Texas UDPIA) set forth in Chapter 240 of the Texas Property Code. One common error we see, in regards to real property interests, is identifying the effect of the statute and disclaimer. One common misconception is that the disclaimant can dictate what happens to the disclaimed property. This is not the case under the statute. For purposes of discussion, we will address the disposition of an interest passing because of a decedent’s death which is disclaimed by an individual (there are other rules for disclaiming an interest in trusts, survivorship property, etc.).

Generally speaking, if the instrument creating the interest (e.g. last will and testament) provides for the disposition of a disclaimed interest, the disclaimed interest passes according to those provisions. If the instrument creating the disclaimed interest does not contain such a provision, the disclaimed interest passes as if the disclaimant had died immediately before the decedent’s death. A disclaimed interest that passes by intestacy (decedent died without a valid last will and testament) passes as if the disclaimant died immediately before the decedent. It should also be noted that there are additional provisions in the statute that address fact patterns where it becomes difficult to determine who takes the interest (e.g., passage to disclaimant’s estate or no descendant of disclaimant).

The statutory requirements must be complied with in order for a disclaimer to be effective. Reliance on a disclaimer of interest in property in an insured transaction will be considered on a case-by-case basis.