Advice Pool - Legal

Question: I am the primary beneficiary of a trust set up by my mother and my 2 daughters (ages 27 and 30) are also beneficiaries. The balance of the trust is to be distributed soon and my daughters want to disclaim any interest in it, so

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

it will all go to me. My question is, what are the tax consequences of this arrangement? The total value of the trust is about $250,000. Thank you, L.

Answer: Dear L - You are right in thinking that there may be some adverse tax conseque

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

nces if your daughters disclaim their share of the trust. Although it is not clear from your question, I am assuming that your daughters acquired a 1/3rd interest in your mother's trust upon your mother's death.

Generally speaking, when

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

a person is designated as the beneficiary of an interest in property under a will or a living trust, the interest vests immediately upon the death of the transferor unless there is some other intervening condition that must be satisfied.

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

The same is true for interests given to designated beneficiaries under retirement plans (including IRAs and 401(k) plans), annuity contracts, and life insurance policies.

There are times, however, when a designated beneficiary doesn't wa

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

nt the interest given to him or her, as is the case with your daughters. People in this situation often think that they can just refuse the interest and that's the end of the story. They feel that way because, in their minds, they haven't

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

actually received anything and, therefore, they don't actually own it.

Unfortunately, the tax laws say otherwise. Once the interest vests in a designated beneficiary, the designated beneficiary is deemed to own it. From that moment on,

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

any refusal or disclaimer of the interest by the designated beneficiary constitutes a gift of the present value of that interest for federal gift tax purposes. The gift is deemed to be made to the contingent beneficiary or beneficiaries d

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

esignated under the governing instrument; i.e., the will, trust, etc.

If that's the case, then how would anyone ever refuse an inheritance without incurring a gift tax? The short answer is that, for many years, you couldn't. If there was

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

any consolation in the way the tax laws were written, it rested in the fact that the resulting transfer could be offset by the annual gift tax exclusion. Any excess over the annual gift tax exclusion could be sheltered from an actual out

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

of-pocket tax payment by the unified credit against gift and estate taxes. Even so, it was still a pain because you had to file a gift tax return and you lost all or part of your unified credit against future gift and estate taxes.

In or

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

der to correct this problem, Congress amended the tax laws to provide for a qualified disclaimer as part of the Tax Reform Act of 1976. A "qualified disclaimer" allowed an individual to refuse an interest in property without being deemed

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

to have made a gift of the interest. In that case, the individual was treated as though he or she had never received it - so there was no need to file a gift tax return, or to use a part of his or her unified credit, or even pay any gift

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

taxes out-of-pocket.

Still, in order to take advantage of the qualified disclaimer provisions, you have to satisfy the following requirements:

(1) The disclaimer must be in writing.

(2) The disclaimer must be given to the personal repr

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

esentative of the decedent's estate or the trustee of the decedent's trust, or to any other person holding legal title to property to which the interest relates, no later than 9 months after the later of —

(A) the day on which the transf

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

er creating the interest in such person is made, or

(B) the day on which such person attains age 21,

(3) The person making the disclaimer must not have accepted the interest or any of its benefits.

(4) And, as a result of such disclaim

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

er, the interest must pass 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.

So, Mrs. L, the go

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

od news is that your daughters can disclaim their interest in your mother's trust without the transfer constituting a gift to you. However, they will have to meet the requirements set forth above, including the requirement that the discla

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

imer be made within nine (9) months after the transfer was made to your daughters. I am assuming that is nine (9) months after your mother's death, but there may be other conditions in the trust instrument that actually delay the vesting

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

of your daughters' interests. For this reason, I would suggest that you consult with an experienced estate planning attorney because these requirements are unforgiving. Once the nine (9) month period has expired, you're simply out of luck

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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