Helping to ensure your assets are distributed according to your wishes is the main intention of estate planning. However, circumstances can change in an instance, making it difficult to predict certain things. Adding qualified disclaimers into your estate plan allows disclaimed assets to pass from a primary beneficiary to a contingent beneficiary while avoiding negative tax consequences. This flexibility is beneficial in a multitude of situations.

Planning For Disclaimers

A disclaimer is an irrevocable, unqualified refusal by a beneficiary to accept a bequest, allowing the property to pass to another beneficiary. Normally, using a disclaimer to direct property to someone else would be considered a taxable gift. But there’s an exception for “qualified” disclaimers.

To qualify, a disclaimer must:

• Be in writing
• Be delivered to the estate’s representative within nine months after the transfer is made (or, if the disclaimant is a minor, within nine months after the disclaimant turns 21)
• Be delivered before the disclaimant accepts the property or any of its benefits
• Cause the property to pass to the deceased’s surviving spouse or to someone other than the disclaimant, without any direction from the disclaimant

This last point is critical and requires some planning on your part. To help ensure the disclaimant doesn’t direct the property’s disposition, the property must pass automatically to a contingent beneficiary according to the terms of your will or trust.

Disclaimers In Action

Here are a couple of examples of situations when qualified disclaimers can provide estate planning flexibility:

Scenario 1. Suppose your will leaves a significant inheritance to your daughter, naming a trust for her children’s (your grandchildren’s) benefit as the contingent beneficiary. By the time you die, your daughter has built a substantial estate of her own. If she accepts the inheritance, it will ultimately be taxed as part of her estate.

Your daughter can disclaim the inheritance and allow it to pass directly to the trust for her children’s benefit, avoiding double taxation. Before making a disclaimer, however, she should check that it won’t trigger the generation-skipping transfer tax.

Scenario 2. Suppose your son is the primary beneficiary of your traditional IRA and your favorite charity is the contingent beneficiary. Your son will have to pay income tax on the distributions, and the account will have to be depleted within 10 years. The distributions could even push him into a higher income tax bracket. And, if your estate’s value exceeds the exemption amount, some or all of the IRA also may be subject to estate tax.

If your son is financially secure at the time of your death, he might want to disclaim the IRA and allow it to pass directly to the charity. By doing so, he eliminates his income tax liability while creating a charitable deduction that reduces the size of your taxable estate.

Turn To Us For Help

Qualified disclaimers can provide estate planning flexibility after death, helping families adapt to changing tax laws, financial needs, and other personal circumstances. But disclaimers generally will be effective only if you’ve named appropriate contingent beneficiaries.

If you’re reviewing your estate plan or considering ways to provide greater flexibility for your heirs, contact us. We can help you determine whether qualified disclaimers should be factored into your overall estate planning strategy.