Disclaimers

A qualified disclaimer is an estate planning technique in which an individual refuses to accept a gift, transfer, bequest or devise.

In order to be a qualified disclaimer, it must satisfy all of the following: 1) it must be irrevocable and unqualified; 2) it must be in writing and signed by the recipient; 3) it must be delivered to the transferor or his or her representative; and 4) it must be made within 9 months of the date that the property interest was created (unless the recipient is under 21 years old, in which case he or she has until 9 months after his or her 21^st birthday to disclaim). It is also important to note that you cannot disclaim an interest in property once you have already accepted it.

The main question that arises from this is “WHY?” Why would anyone refuse a valuable gift/bequest? The answer depends on the financial state of the recipient. In conjunction with their financial situation, the gift amount needs to be analyzed in light of the individual’s remaining  unified credit (estate and gift tax) exemption amount ($5,450,000 in 2016). The reason being it would be unwise for a recipient to accept a large financial gift or bequest (especially if it is not needed for financial well-being), only to ultimately pay estate tax on the value of the disclaimed asset at the time of his or her death.

For example, a widow dies leaving all of her property to her son. The will also provides that if her son does not survive, her estate is to be divided equally to her son’s children. Furthermore, let’s assume in this example that the son does not need the money and has used up his entire $5,450,000 exemption amount through gifts during his lifetime. If the son makes a qualified disclaimer, the property will pass directly to his children and he will not be deemed to have made a taxable gift to his children.         

Although it may seem illogical to decline a significant gift, a disclaimer is an important estate planning technique that provides flexibility with the ever-changing unified credit exemption amount and the desire to reduce one’s taxable estate.