Here is a plan that looks clever on paper. You owe the IRS. A parent dies and leaves you money. Under state law, you can disclaim the inheritance, which treats you as if you died first, so the money passes to your child instead. Your creditors get nothing. Your family keeps the money.
The Supreme Court looked at that plan in Drye v. United States and said no, at least when the creditor is the IRS.
The Facts
Irma Deliah Drye died without a will on August 3, 1994. Her estate was worth about $233,000. Her son, Rohn F. Drye, Jr., was her sole heir under Arkansas law. On the day she died, he was insolvent and owed the federal government on tax assessments for 1988, 1989 and 1990. The IRS held valid tax liens on all of his property and rights to property under IRC § 6321.
Drye was appointed administrator of his mother's estate. Almost six months later, on February 4, 1995, he filed a written disclaimer of all interests in the estate. Arkansas law allowed an heir to disclaim within nine months of death, treated the disclaimant as having died before the decedent, and said the disclaimant's creditors could not reach disclaimed property.
The estate passed to his daughter, Theresa Drye. She put the money into the Drye Family 1995 Trust, a spendthrift trust whose beneficiaries included her and, during their lives, her parents.
During negotiations with the IRS, Drye disclosed his interest in the trust. On April 11, 1996, the IRS filed a notice of federal tax lien against the trust as Drye's nominee and levied on the trust's investment accounts. The trust sued for wrongful levy under IRC § 7426. The District Court and the Eighth Circuit ruled for the government.
The Issue
When state law lets an heir disclaim an inheritance retroactively, does the heir's interest in the estate still count as "property" or "rights to property" to which a federal tax lien attaches?
The Holding
Yes. Justice Ginsburg wrote for the Court, which affirmed: "We hold that the disclaimer did not defeat the federal tax liens."
The Reasoning
The two-step test
The Court made the framework explicit, and it is now the standard formulation. "We look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as 'property' or 'rights to property' within the compass of the federal tax lien legislation."
Two federal appeals courts had held that state law controlled the whole question, so the result turned on whether a state used an "acceptance-rejection" theory or a "transfer" theory of inheritance. The Supreme Court rejected that approach. State law defines the rights. Federal law decides their tax consequence.
The Code does not recognize disclaimers for collection
The Court pointed to the structure of the Code. IRC § 6334(a) lists the property exempt from levy, and § 6334(c) says nothing else is exempt. Disclaimed inheritances are not on the list. Meanwhile, IRC § 2518 expressly makes qualifying disclaimers effective for federal wealth-transfer taxes, and only for those purposes. Congress knew how to honor disclaimers when it wanted to.
The Court also quoted an earlier decision with a line worth remembering: federal tax law "is not struck blind by a disclaimer."
The power to channel is the property
Drye argued that his right to disclaim was personal, like the right to refuse a gift. The Court did not buy it. Someone who refuses a lifetime gift restores the status quo; the donor keeps it. An heir cannot restore the status quo, because the decedent cannot be revived. Either the heir takes the property, or he sends it to a known next person in line. "This power to channel the estate's assets warrants the conclusion that Drye held 'property' or a 'righ[t] to property' subject to the Government's liens."
The Court tied it together with a test borrowed from an older case: "[t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property." Drye could take the whole estate or direct it to his daughter. That is control.
What the Court left open
The Court was careful about the edges. It said it was not deciding whether a mere expectancy, such as the hope of inheriting from someone still alive, is property before it ripens into a present estate. The lien in Drye attached because the mother had died and the son's rights had vested in a real, present sense.
What It Means for Taxpayers Today
If you owe the IRS and inherit, the lien is waiting
Assume the federal tax lien attaches to your inheritance the moment you have the right to it. A disclaimer will not unwind that, even if your state's law says the disclaimer relates back to the date of death and blocks other creditors. The IRS can follow the property to the person who received it, and in Drye it followed the money into a family trust and treated the trust as the debtor's nominee.
Disclaiming can make things worse
The Drye family spent years in litigation and lost. Moving money into a spendthrift trust for the benefit of the debtor and his family drew a nominee lien and a levy. Transfers like that can also raise fraudulent conveyance questions and can affect how the IRS views your good faith in any later negotiation. Clever is not the same as smart.
Use the inheritance as a resolution tool instead
An inheritance is often the single best opportunity a taxpayer has to resolve an old IRS debt on decent terms. Depending on the facts, that can mean paying in full and stopping the interest, funding an offer in compromise, or paying down the balance enough to qualify for a more manageable installment agreement. Talk to a tax attorney before the estate closes, while you still have options about timing.
Honesty with the IRS is not optional
Notice how the IRS learned about the trust in Drye. Drye told them, during negotiations over his tax debt. That is how it should work, and it is the only way it can work. Any resolution with the IRS, whether an installment agreement, currently not collectible status or an offer in compromise, rests on complete and truthful financial disclosure. Leaving an inheritance or a family trust off a financial statement does not hide it. It just turns a collection problem into a credibility problem, and sometimes into something worse. Disclose it, and then argue about what it is worth.
For executors
If you are the personal representative and you know an heir owes the IRS, take the lien seriously. Distributing to someone else because the heir disclaimed does not clear the property. In Drye, the heir's daughter ended up defending the trust in federal court. Our discussion of how federal tax liens work explains why a recorded lien makes this an issue at distribution.
Estate tax disclaimers are a different animal
Do not confuse Drye with estate planning. A qualified disclaimer under IRC § 2518 can still be a legitimate way to shift who receives property for federal estate and gift tax purposes. Drye only says that the same disclaimer will not defeat a federal tax lien against the person disclaiming.
The Bottom Line
Drye is the inheritance version of a rule that runs through every lien case on this site, including Craft and National Bank of Commerce. State law tells you what you have. Federal law tells you whether the IRS can take it. When you have the power to decide who gets the money, the IRS says you have property, and the Supreme Court agrees.