Planning Using Disclaimers

The Disclaimer is a valuable estate planning tool that can be used to adjust for unforeseen consequences of an estate plan and to achieve optimum tax results.

A disclaimer is an irrevocable and unqualified refusal by a person to accept an interest in property. The disclaimer must be a 'qualified disclaimer' to be effective under the Internal Revenue Code. If the disclaimer adheres to the requirements of the Code, then for purposes of estate, gift, and generation- skipping transfer taxes, the interest will be treated as if it had never been transferred to the disclaimant. The interest is considered as passing directly from the transferor and accordingly, a person making a qualified disclaimer is not treated as making a gift. Any person can disclaim an interest in property they are entitled to receive through inheritance.

People cannot see into the future and determine what the value of their estate will be at their death. A disclaimer can provide the disclaimant with flexibility and discretion at that time resulting in significant tax savings. For example, at the death of the first spouse, the surviving spouse can use a disclaimer to cut back on a trust not qualifying for the marital deduction to create a qualifying marital gift, and conversely, to cut back on a marital gift in order to use the unified credit fully or if one spouse's estate is significantly larger than the other's estate, a disclaimer can be used to equalize estates for estate tax purposes. The disclaimer may also be used to reject a specific legacy or trust interest and cause it to pass to grandchildren for purposes of the federal generation-skipping transfer (GST) tax exemption or to salvage a marital deduction where the marital disposition contains provisions or powers that would otherwise disqualify the gift from the marital deduction exemption.

To meet the criteria and therefore make a qualified disclaimer, the disclaimer must be in writing and be received by the transferor's legal representative, the transferor of the interest, or the legal title holder to the property. The disclaimer must be received within nine months from the date of death (for estate planning purposes) and the person making the disclaimer must not have accepted the interest or any of its benefits.

The disclaimed interest passes either to the decedent's spouse or to a person other than the person making the disclaimer and must pass without any direction on the part of the person making the disclaimer.

An estate plan can be drafted that provides for the transfer of all of the decedent's interest in property to the surviving spouse, and yet allow the surviving spouse to disclaimer all or a portion of the property in which case the trust document will direct the disclaimed property. Typically, in this situation, used to preserve the decedent spouse's unified credit, the interest will be transferred to a Bypass Trust. If the trust is properly drafted to satisfy the requirements of disclaimer law, the disclaimer will be valid and the property will be excluded from transfer taxes even though it seems as if the surviving spouse directed the transfer and will ultimately benefit from the disclaimed property. Only a spouse can make a qualified disclaimer that results in the disclaimed property interest passing to the person (in this case the spouse) making the disclaimer.

One disadvantage of disclaimer planning is that the disclaimant must be proactive and execute and deliver the disclaimer in the limited time required by law (9 months) for it to be valid. If the disclaimer is not prepared in the manner prescribed by law and delivered to the appropriate party within the time parameters, any estate tax savings will be lost.