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Estate Planning Needs Qualified Disclaimers


Qualified disclaimers can often play an important role in financial planning, tailoring asset allocations, within the family. For example, disclaimers might move assets to a family member that is less likely to have lawsuit or divorce problems.

Jan 19th 2021
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Your clients may qualify to disclaim assets that are coming to them, but can’t disclaim what is not coming their way. Following is an example from the regulations:

A husband and wife (H and W), reside in state X, a community property state. On April 1, 1978, H and W purchased real property with community funds. The property is not held by H and W as jointly owned property with rights of survivorship.

H and W hold the property until January 3, 1985, when H dies. H devises his portion of the property to W. On March 15, 1985, W disclaims the portion of the property devised to her by H. Assuming all the other requirements of section 2518 (b) have been met, W has made a qualified disclaimer of the interest devised to her by H.

However, W could not disclaim the interest in the property that she acquired on April 1, 1978 (Regs. 25.2518-2, Example (11)). The disclaimant usually knows where the disclaimed assets will go, which can be tantamount to deciding the path of a transfer without having made a gift that incurs gift tax or absorbs one’s transfer tax exemption.

Joe Biden’s election suggests some possible eventual modifications of the transfer tax exemptions. The 2020 transfer tax exemption is $11,580,000. The 2021 transfer tax exemption is $11,700,000. The relatively large exemption expires in 2026 under current law. 

Since 2013, there is an element of portability of unused exemption amounts being available to the surviving spouse. The annual gift tax exemption remains at $15,000 in 2021, unchanged from 2020.

The basics of avoiding a taxable transfer are found in Section 2518(b)   

  • The disclaimer needs to be written.
  • The writing needs to be received by the transferor’s legal representative no later than nine months after the later of the day on which the transfer creating the interest in the person is made or the day such person turns age 21.
  • The person must not have accepted the interest or any of its benefits.
  • Pointing/controlling the transfer is not permissible; the interest must pass without any direction of the person making the disclaimer, and pass either to the decedent’s spouse or to a person other than the one making the disclaimer.

The nine-month rule, like so many other tax topics, can be impacted in 2020 by the coronavirus.  

“(I)f the period of time to make a qualified disclaimer expires on or after April 1, 2020, and before July 15, 2020, then a taxpayer has until July 15, 2020, to make a qualified disclaimer, provided however that the disclaimer must be timely and valid under state law. This relief is provided through Notice 2020-23’s incorporation of the relief provided in Rev. Proc. 2018-58.” (“Covid-19 Relief for Estate and Gift,” IRS.gov).

It is often recommended that disclaimers be accomplished sooner rather than approaching the nine-month deadline.  This is out of concern that steps may have been taken with respect to the assets that move them out of eligibility for disclaimer.

It may be possible to tailor the disclaimer, make a qualified disclaimer as to a portion of an interest, assuming the requirements for a qualified disclaimer are met (See Regs. 25.2518-3).

Failing the requirements for a qualified disclaimer can translate into a taxable gift.  The disclaimant would then be treated as transferring her or his interest to the contingent beneficiary.  The result can be a taxable gift, possibly even gift tax.  On gift tax generally, see this useful website: “Frequently Asked Questions on Gift Taxes,” on IRS.gov.

Disclaimer planning includes such possibilities as having a trust (or trusts) in line in the event the individual does disclaim some interests in the estate. Think “tailoring” the plan when considering the possibility of future disclaimers and the potential advantage of a disclaimer trust.  

Such trusts have tax planning significance, but they can also be important when the couple’s assets won’t rise to the level of transfer tax liability. Disclaimer trusts can play a role in getting assets to children versus, potentially, the surviving spouse’s next spouse.

In conclusion, disclaimers remain an important element in testamentary planning. They are highly useful and practical elements of a judicious estate plan, including estates below the level of incurring estate tax. However, we also keep in mind the potential for transfer taxes being incurred at lesser levels.

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