Disclaimers: When Rejecting an Inheritance is Actually Beneficial

February 1, 2012
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For 2012 only, anyone who dies with less than $5.12 million will not owe any federal estate tax.  This protection is presently set to decrease to $1 million on January 1, 2013.  While few believe that lawmakers won’t increase this amount before the end of the year, anything is still possible.

Therefore, individuals with between $1 million and $5.12 million of assets are presently in a quandary.  Will their estates be subject to federal estate taxes after 2012 or not?

Further, if this is the case, why not just wait the 11 months to see what the Federal Government does before initiating your estate plan?

Because wills and trusts can be drafted in a way that allow you to protect your family now, while also allowing you to wait and see what happens in the future.  This is done through techniques enabling you to defer any questions that are presently unanswerable (such as whether or not you will owe any estate tax) until after your death.

One of the most common methods of accomplishing this is by including “disclaimer” language in your primary estate documents.

Disclaimers

Disclaimers enable the beneficiary to reject all or some of a gift received by will or trust.  In other words, after the decedent’s death, the beneficiary is basically left with an option – to keep the gift or let the gift be distributed in some other way.

The “some other way” is also laid out in specific detail when the will or trust is drafted.  This enables the beneficiary to pick the best choice under the then-present circumstances.

Disclaimer Examples

Let’s illustrate.

Example 1:  A is married to B and has $6 million in his estate.  His trust leaves everything to B without any disclaimer powers.

  • Whenever A dies, A’s gift to B would qualify as a gift under the unlimited marital deduction.  Therefore, A’s estate will not use any of A’s available estate tax credit, resulting in additional estate taxes after B’s death.
    • Of course A’s executor could opt for portability (the right for a surviving spouse’s estate to utilize any unused exemption from the decedent spouse’s estate), but there is no guarantee that this option will last beyond 2012 either.

Example 2:  Same facts, except A adds a disclaimer power to his trust – B can disclaim any or all of A’s gift, and any disclaimed assets would go into a Family Trust that pays income to B for life, and then goes to A & B’s children.

  • If A dies in 2012, any assets B disclaimed up to $5.12 million would qualify for A’s estate tax credit.  This would potentially save up to over $1 million of estate taxes after B’s death.
    • If disclaiming the full $5.12 million places too great a hardship on B, she has the flexibility to choose a lesser amount to disclaim.
    • If A dies in 2013 and then B disclaimed $1 million, this would also maximize A & B’s estate tax credits.
      • If the couple is concerned that this gives B too much control over A’s remaining $5 million, tools such as a QTIP trust would also be set up in the initial plan to further protect B and the family.

Obviously, other provisions resulting from a disclaimer could be included in the plan as well, such as gifts to charity or to more needy relatives.

Requirements

Under the Internal Revenue Code (at 26 U.S.C. § 2518):

  • A disclaimer is valid if it is an irrevocable and unqualified refusal to accept property, and:
    • It is in writing.
    • It is received by the transferor or personal representative within 9 months of the day of transfer (or the transferee attains age 21).
    • The transferee has not received the asset or any of its benefits at any time before it is disclaimed.
    • The asset must pass without any direction from the survivor.
    • It must adhere to state law (which may have additional requirements as well).

Disadvantages

Keep in mind that using disclaimers in your estate plan is not necessarily all beer and skittles:

  • During the grieving period, it is easy for the beneficiary to forget to make the disclaimer on time.  This mistake can obviously be quite costly to the family.
  • In many cases, the disclaimed assets are shifted into a Family Trust that names the surviving spouse as trustee.  If this happens, the Internal Revenue Code does not allow that surviving spouse to hold a “limited power of appointment” (see here) over the disclaimed assets.
    • This prevents the survivor from disclaiming assets but then later have some power over them anyway.

Conclusion

While it is perhaps frustrating to deal with an ever-changing tax code, take solace in the fact that methods such as disclaimers exist to help you accomplish your estate planning goals regardless.

 Disclaimers: When Rejecting an Inheritance is Actually Beneficial
 Disclaimers: When Rejecting an Inheritance is Actually Beneficial

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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One Response to Disclaimers: When Rejecting an Inheritance is Actually Beneficial

  1. July 24, 2012 at 2:37 am

    An outstanding share! I’ve just forwarded this onto a colleague who had been conducting a little research on this. And he actually ordered me breakfast simply because I found it for him… lol. So allow me to reword this…. Thank YOU for the meal!! But yeah, thanx for spending some time to discuss this topic here on your website.
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