“Thanks, but no thanks.” If you expect to receive an inheritance from a family member, such as a parent or other loved one, you might choose to use a qualified disclaimer to refuse the bequest. As a result, the assets will bypass your estate and go directly to the next beneficiary in line. It’s as if the successor beneficiary, not you, had been named as the beneficiary in the first place.
Why would you ever look this proverbial gift horse in the mouth? Frequently, using a legally valid disclaimer (see “5 legal requirements for qualified disclaimers”) will save gift and estate taxes, while redirecting funds to where they ultimately would have gone anyway. This estate planning tool is designed to benefit the entire family. Be aware that a disclaimer doesn’t have to be an “all or nothing” decision. It’s possible to disclaim only certain assets, or only a portion of a particular asset, which would otherwise be received.
Reasons for using a disclaimer
Federal estate tax laws are fairly rigid, but a qualified disclaimer offers some unique flexibility to a forward-thinking beneficiary. Consider these possible reasons from an estate planning perspective:
Gift and estate tax savings. This is often cited as the main incentive for using a qualified disclaimer. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to nonspouse beneficiaries, such as your children and grandchildren, may be covered by the gift and estate tax exemption.
Currently, the exemption can shelter a generous $5.49 million in assets for 2017. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $10.98 million in 2017 to their heirs free of gift and estate taxes.
However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. By using a disclaimer, the exemption won’t be further eroded by the inherited amount. Assuming you don’t need the money, shifting the funds to the younger generation without it ever touching your hands — as well bypassing your taxable estate — can save gift and estate tax for the family as a whole.
Generation-skipping transfer (GST) tax. Disclaimers may also be useful in planning for the GST tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is $5.49 million for 2017.
If GST tax liability is a concern, you may wish to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from the GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.
Family businesses. A disclaimer may also be used as a means for passing a family-owned business to the younger generation. By disclaiming an interest in the business, you can position stock ownership to your family’s benefit.
Creditor protection. Any inheritance you receive would immediately be subject to claims of creditors. It might be possible to avoid dire results by using a disclaimer to protect these assets. However, be aware that state laws and federal bankruptcy laws may defeat or hinder this goal. Consult with your estate planning advisor about your specific situation.
Charitable deductions. In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance, but using a disclaimer can provide a deduction because the assets will pass directly to the charity.
Look before you leap
Before you “give away the farm,” make sure that you’re standing on firm legal ground and that using a disclaimer is the best approach. Find out about the applicable laws, especially if you’re relying on a disclaimer for creditor protection. Be careful to meet any deadlines imposed under federal and state laws. And be aware that multiple disclaimers may be required if you’re not the only beneficiary.
Finally, be absolutely certain about the next beneficiaries in line. Once you’ve checked all the boxes, your estate planning advisor can provide the necessary assistance.
Sidebar: 5 legal requirements for qualified disclaimers
To be legally valid as a qualified disclaimer, the following five requirements must be met:
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The disclaimer is made in writing and signed by the disclaiming party.
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The disclaimer must be irrevocable and unqualified.
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The disclaimant (that is, the person disclaiming) must not accept the interest or any of its benefits.
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The disclaimer is delivered to the person or entity charged with the obligation of transferring the assets no more than nine months after the date the property was transferred or nine months after a disclaimant who is a minor reaches age 21.
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The interest must pass to a person other than the disclaimant without any direction by the disclaimant. Bear in mind that the spouse of the deceased is specifically authorized to be the person receiving the property by virtue of a disclaimer.
