Saying No Thanks: Qualified Disclaimers in Estate Planning
A beneficiary can refuse an inheritance and let it pass to the next person in line as if the beneficiary had died first, with no gift tax. The rules are strict, the nine month clock is unforgiving, and the technique is more useful than most families realize.
Most estate planning is about getting assets to the people you choose. A qualified disclaimer runs the other way. It lets a beneficiary say no thanks to an inheritance or a gift, so that the property passes to the next person in line as if the beneficiary had died first. Done correctly, the person disclaiming is not treated as having made a gift at all.1 Done incorrectly, the beneficiary has made a taxable gift of the full amount. The difference is in the details.
The four requirements
A disclaimer is qualified for federal tax purposes only if it meets every one of the following.2
- It is in writing and irrevocable. There is no changing your mind.
- It is delivered to the transferor, the executor or the holder of legal title within nine months after the transfer that created the interest. For an inheritance, that means nine months after the date of death. A beneficiary under 21 has until nine months after turning 21.
- The person disclaiming has not accepted the interest or any of its benefits. Cashing a dividend check, moving into the house or directing the investments can all amount to acceptance.
- The property passes without any direction from the person disclaiming, either to the decedent's surviving spouse or to someone other than the person disclaiming. The disclaimant cannot pick the recipient. The Will, the trust or state intestacy law does.
That last point has one important exception. A surviving spouse may disclaim and still receive the property through another route, such as a trust the Will creates for her benefit, as long as she does not retain a power to direct where it goes.3
State law supplies the rest. Florida, for example, has adopted the Uniform Disclaimer of Property Interests Act, which governs who may disclaim, how the disclaimer is signed and filed, and when a disclaimer is barred.4 The state rules and the federal rules are not identical, and a disclaimer has to satisfy both.
Where disclaimers earn their keep
- Post death tax planning. A Will that leaves everything to the surviving spouse wastes nothing today, because the marital deduction defers the tax, but it may crowd the survivor's estate. A disclaimer by the spouse can route assets into a credit shelter trust or to the children, using the first spouse's exemption. Many Wills are drafted with a disclaimer trust built in for exactly this purpose.
- Retirement accounts. A beneficiary who does not need an inherited IRA can disclaim it to the contingent beneficiary, often a child in a lower bracket or with a longer payout. The IRS has confirmed that taking the decedent's required minimum distribution for the year of death does not by itself defeat a later disclaimer of the rest of the account, provided the income earned on the disclaimed portion goes with it.5
- Generation skipping. A child who is already wealthy can disclaim in favor of grandchildren. Whether that triggers generation skipping transfer tax depends on how the decedent's GST exemption was allocated, so this move should be modeled before it is made.
- Fixing a mistake. A beneficiary designation that was never updated, an outdated Will or an unintended joint tenancy can sometimes be corrected after death by a cooperative beneficiary's disclaimer, where the next taker is the person the decedent actually wanted.
- Creditor exposure. Because a qualified disclaimer is treated as if the disclaimant never received the property, it may keep an inheritance away from the disclaimant's creditors. The protection is not universal. Federal tax liens and bankruptcy present special problems, and this use needs state specific advice.
The traps
The nine months run from the date of death, not from the date the beneficiary learns about the inheritance or the date the estate is opened. An executor who distributes early, or a beneficiary who takes a benefit while deciding, can lose the option. Disclaimers of joint property, of interests in trusts and of powers of appointment each have their own rules. And a disclaimer that works for federal purposes but fails a state formality, or the reverse, is worse than none at all.
The lesson for planning is simple. Build disclaimer flexibility into the documents in advance, name contingent beneficiaries deliberately, and tell the family that the first nine months after a death are a window, not a waiting room.
Notes
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.