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I’ll take a pass

Use a qualified disclaimer to forgo an interest in property

When it comes to estate planning, the more flexibility your plan affords, the better. Why? Estate planning isn’t static – after you create your plan, life continues and your circumstances likely will change. Estate tax laws also might change, warranting different strategies. A qualified disclaimer is one estate planning tool that provides you some flexibility. Note that the disclaimer strategies discussed here assume the estate tax is in effect.

Defining a disclaimer

A disclaimer is an irrevocable and unqualified refusal to accept an interest in property. When you make a disclaimer, the disclaimed property is treated as if it had never been transferred to you. The property then passes according to the terms of the transferor’s will or trust as if you had died before him or her – you don’t get to choose whom the property will pass to. If your disclaimer is “qualified,” the property will be redirected without negative gift or estate tax consequences. Under the Internal Revenue Code, a disclaimer of an interest in property is qualified if it’s in writing and is delivered to the transferor (or his or her representative) within nine months after the transfer is made or, if later, within nine months after the disclaimant turns age 21. In addition, the disclaimant must not have accepted the disclaimed property interest or any of its benefits.

A disclaimer in action

Let’s say Jack and Janet have had successful careers and built substantial wealth, but they haven’t implemented smart estate plans. As a result, most of their assets are either held jointly or in Jack’s trust. After Janet’s death, the jointly held property passes to Jack by operation of law. Regrettably, Janet’s entire estate tax exemption is wasted.

A disclaimer can be the answer. By Jack disclaiming, Janet’s half of the account will pass directly to their son, as though Jack had predeceased Janet. The family can benefit from Janet’s estate tax exemption and, to the extent the transfer doesn’t exceed her exemption, the transfer will be estate tax free.

For married couples in community property states special care may be needed when considering disclaimers; check with your estate planning advisor.

In another example, let’s say Carol, an 80-year-old widow, has an estate in excess of the estate tax exemption. She’s been gifting regularly for years and is making arrangements to implement other wealth transfer strategies. Carol’s only sibling, Julie, has never married and has no children. She hasn’t created an estate plan; thus, on Julie’s death, Carol stands to inherit everything.

To make up for Julie’s lack of planning, Carol uses a disclaimer. By disclaiming her entire interest in Julie’s estate, Carol causes Julie’s net worth to pass directly to Carol’s children rather than adding more taxable wealth to Carol’s estate.
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