Download Chapter 11

Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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)
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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Disclaimers
Chapter 11
Tools & Techniques of
Estate Planning
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
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