What is a Disclaimer?

1. What is a Disclaimer? • A disclaimer (renunciation) is an unqualified refusal by a potential beneficiary to accept benefits given through a testamentary or lifetime transfer of property

2. When is a Disclaimer Used? • When an individual with children and a large estate in her own right is left a bequest by another individual which would compound her potential estate tax problem • Be careful that disclaimer will not constitute a direct skip from transferor to taker(s) after disclaimer and create GST tax consequences • Where an individual is in a high income tax bracket and the bequest says “if she is living, otherwise to her children” and the children are in a lower income tax bracket

3. When is a Disclaimer Used? (cont’d) • Where an individual wishes to make a tax free transfer to the person who would be the next recipient under the will or trust • When property is left to a spouse and the spouse does not need or want it, disclaimer can avoid needless double taxation • To increase the decedent’s estate to an amount which will be fully offset by the unified credit and keep property out of the surviving spouse’s estate

4. When is a Disclaimer Used? (cont’d) • Disclaimer by other beneficiaries to take advantage of the optimum marital deduction • Disclaimer by other beneficiaries to help an interest passing to charity qualify for the charitable deduction • Disclaimant entitled to an annuity or unitrust payment from a charitable remainder trust disclaims, transferor entitled to 100% charitable deduction instead of value of remainder interest • To correct error in will or trust

5. Disclaimer Requirements • Irrevocable and unqualified refusal to accept an interest in property • Refusal must be in writing • Writing must be received by • Transferor • Transferor’s legal representative, or • Holder of legal title to the property

6. Disclaimer Requirements (cont’d) • Refusal must be received no later than 9 months after day on which • Transfer creating interest is made or • Donee / beneficiary attains age 21 • Disclaimer must be made prior to acceptance of any interest or any of its benefits

7. Disclaimer Requirements (cont’d) • Interest must pass either to • Spouse of decedent or • Person other than disclaimant • Without any direction on part of disclaimant • Interest disclaimed should be an entire interest (but can be an undivided fractional part of the proposed gift)

8. Tax Implications • Disclaimer of property interest or power not a gift for gift tax purposes • A disclaimed interest in property not considered a transfer by disclaimant decedent and not included in estate for estate tax calculation

9. Tax Implications (cont’d) • Property disclaimed in favor of surviving spouse or charity qualifies for the marital or charitable deduction (that would otherwise be permitted) • Income received on disclaimed property is charged to the person in whose favor the property was disclaimed

10. Community Property • Qualified disclaimer taken into account for purposes of marital deduction • Surviving spouse should exercise caution to disclaim only the ½ community property interest belonging to the decedent • Disclaimer of both halves will probably result in a taxable gift to individual who takes as a result of disclaimer

11. Permissible Disclaimers • Life insurance proceeds • Jointly held property interest • After attaining age 21 for assets received during minority • Spousal disclaimer (all or partial) even where assets pass to a trust in which spouse is an income beneficiary • “Blank check” postmortem marital deduction planning

12. Permissible Disclaimers (cont’d) • Spousal disclaimer of a portion of the survivor benefits under a qualified pension or profit sharing plan • Beneficiary disclaimer of interest in part or all of trust • Income • Corpus • Specific percentage

13. Disclaimers – Factors to Consider • Where disclaiming beneficiary is indebted to the estate, specify whether debt may be set off against alternative takers • Disclaimer of a power may extinguish it, consider naming an alternate power holder • Disclaimer of a legacy may result in property passing to disclaimant’s issue under anti-lapse statutes • Disclaimer could cause premature closing of a “class” of beneficiaries

14. Disclaimers – Factors to Consider (cont’d) • Valid partial disclaimer must represent an “undivided portion of an interest” • Express partial disclaimer in form of a fraction or percentage • Provide for an alternative taker to avoid disclaimed property from passing to the disclaimant (unless it is a surviving spouse) • Indicate whether a disclaimer accelerates future interests

15. Disclaimers – State Laws • State law controls property rights • Federal statutory period is nine months, check the state period, state may be shorter • Federal law provides that the disclaimer can be effective if the property passes as the result of the disclaimer to the party that would have received it if the disclaimer had been effective under state law