Using Disclaimers

It’s difficult to even think that someone might not want to accept inherited assets. But sometimes clients don’t need any more assets and a newfound inheritance simply may compound their estate tax issues.

A “qualified disclaimer” is a creature of statute. It’s found in Section 2518 of the Code. If you meet the requirements, then the disclaimant is treated as having predeceased the decedent and it’s not considered to be a gift by them and won’t use any of the erstwhile recipient’s gift/estate tax exclusion.

Section 2518 has several requirements:

  1. The refusal must be in writing,
  2. The refusal must be received by the transferor of the interest (or the representative or legal title holder) within 9 months of the date of death or when the instrument creating the transfer became irrevocable (or the date the recipient achieves age 21),
  3. They must not have accepted any of the benefits of the property, and
  4. The interest must pass without direction to the decedent’s spouse or someone other than the disclaimant.

Let’s look at a quick example:

Granny leaves a Will leaving Blackacre to John. The terms of the Will provide that if John predeceases Granny, the bequest goes to John’s daughter, Betty. Blackacre is worth $3 million. John already has used all of his exclusion. He’d like to see Blackacre go to his daughter, Betty. If John accepts Blackacre and makes a gift of it to Betty, he’d be making a taxable gift of $3 million, which would incur a $1.2 million gift tax. If John does a timely qualified disclaimer, Blackacre would pass as though John predeceased Granny. Since Granny’s Will provides that the property would go to Betty if he predeceased her, this would accomplish John’s wishes without needing to direct where it goes. This saves John $1.2 million in these circumstances.

If you’re contemplating a disclaimer, it’s vital to map out where the disclaimed property would go after the disclaimer. Sometimes this can be very complicated. But it’s absolutely essential since the disclaimant has no control over it. It’s somewhat like releasing water from a dam. You need to know what the course of the river is before you release the water. Sometimes it may be possible to change the course of the river by doing a double disclaimer or some other mechanism.

After you’re confident the disclaimed property would go where intended, it’s imperative you follow the requirements of Section 2518 to the letter. For example, it’s impossible to get an extension on the 9-month deadline for a disclaimer. It doesn’t matter if the disclaimant were sick or had extenuating circumstances. The deadline cannot be changed.