Advanced Underwriting Consultants

Qualified Disclaimers

Many times the absence of a will, or an out-of-date or poorly drafted will, or an out of date beneficiary designation causes undesirable consequences. Consider these examples:

John, a wealthy client, is the primary heir of a bequest from his unmarried aunt. His children are to receive the remainder of the aunt’s estate in smaller bequests. John would prefer the aunt’s entire estate go directly to his children rather than increase his already large estate.

Mary is the sole heir of her recently deceased husband. Many years ago they executed so-called “I love you” wills in which each left everything to the other. Over the years their combined estates grew to a sizable amount and now Mary desires that $2,000,000 of her husband’s estate pass directly to their children to make use of his estate tax applicable credit.

Betty’s late husband had no will; everything they owned was titled in his name alone. The estate isn’t large, consisting of the family home, a car, and a modest savings account. Under the applicable state intestacy law, Betty will receive one-half of the estate and her grown children share the remaining half equally. Betty’s children are all financially independent and want their mother to receive the entire estate.

A qualified disclaimer is one solution in each of the above cases.

Qualified Disclaimer Defined

A qualified disclaimer is a refusal to accept a transfer of property by a potential recipient of a bequest or devise, thereby shifting the devise or bequest to whoever is next in line. For federal tax purposes, the disclaimant is not considered to have received the property; it is as if the disclaimant predeceased the testator. No transfer subject to gift, estate, or generation-skipping tax is deemed to occur between the disclaimant and the ultimate recipient.

Qualified disclaimers require that:

The disclaimer must be irrevocable.  No power to revoke or amend can be retained.

The disclaimer must be unqualified.  The disclaimer cannot be contingent on other events.

The disclaimer must clearly identify what property is being disclaimed.

The disclaimer must be in writing and signed.

The disclaimer must be received by the appropriate party; for example, the executor or administrator in the case of an estate, or the IRA custodian in case of an IRA.

The disclaimer must be timely.  It has to be delivered within nine months of the date of the event causing transfer; for example, death in the case of an estate or IRA.  A minor disclaimant must deliver the disclaimer within nine months after reaching the age of majority.

The disclaimer must be made prior to acceptance of the disclaimed property.  The property must be disclaimed prior to accepting any interest in or benefit from it. Thus, if rental property is to be disclaimed, it’s crucial the disclaimant accept no rent checks. Similarly, no investment income may be accepted from investment property prior to disclaiming. It’s possible to make a partial disclaimer, as in the case of a spouse named sole legatee who wishes to pass $2,000,000 directly to the children, but to retain the remainder of the estate for herself.

The disclaimed property must pass without direction from the disclaimer.  A disclaimant can’t direct the property refused; the successor recipient will be determined by the will, or if there is no will, by state intestacy law.  For example, a parent’s will divides the estate equally among the parent’s then living children. If one of the children disclaims her share, it won’t go to her children, but will be divided equally among the disclaimant’s brothers and sisters. Before executing a disclaimer, a client should ask his or her attorney to confirm that the desired recipients will receive the refused property.

Planning For Disclaimers

It’s possible to plan in advance for disclaimers. For instance, if a grandparent writes a will dividing the estate among his children, he might name the grandchildren contingent legatees of their respective parent’s portion. The parent then may disclaim in favor of his or her respective children, rather than have the disclaimed property divided among siblings. The grandparent or parent might adopt a will clause that puts the children in a position to make tax-efficient moves later through disclaimers.

In the case of an IRA, the owner may make the spouse the beneficiary, but should also name a secondary beneficiary in case the spouse chooses to disclaim.

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