Use of the disclaimer to achieve customer objectives: Double disclaimer


It’s hard to even think that someone might not want to accept inherited assets. But sometimes clients don’t need more assets, and a newfound inheritance can simply exacerbate property tax issues. This is the second of two articles related to the disclaimer. The first article covered the basics of the disclaimer. This second article deals with a more complex “double disclaimer” and an example of this situation.

As examined in the first article, the requirements for a qualified disclaimer are set out in Section 2518 of the IRC. It shall be in writing, within 9 months, receiving no interest, and passed either to the spouse or any other person other than the assignee.

Sometimes a simple one-step disclaimer will help you achieve a client’s goals. Examine the first article like this example. However, sometimes the situation is more complex and a disclaimer may be necessary to achieve the client’s goals.

Let’s look at an example:

Bill had confidence leaving everything to his surviving wife, Mary. However, if Mary abdicated, the property would be kept in trust for Mary and Bell’s children, Sally and Jason. On Mary’s death, the trust provides that the property will go directly to Sally and Jason. If Sally or Jason Marie died beforehand, the property would go to their grandchildren, if any, or Bill’s grandchildren.

Mary decided that she did not want Blackacre and wanted it to go to her children immediately without using any estate/gift tax exemption. The first step in this process is for Mary to implement a qualified property disclaimer. This is the first disclaimer Blackacre has sent to Bypass or the Family Trust for its own benefit and for the benefit of Sally and Jason. (Remember, although Mary will benefit from the Bypass Trust, this satisfies the requirements for a qualified disclaimer because she is the wife of the deceased.) Then, Mary will execute else Qualified disclaimer, this time from her interest in the Bypass Trust. Mary is now treated as previously deceased and the property will go to Sally and Jason. Indeed, if desired, the family can go one step further. Let’s say Mary just wanted Sally to get Blackacker and Jason agreed to that plan. After Marie made the first disclaimer by sending Blackacre to me Bypass Trust and its second disclaimer in a Bypass Trust, Jason could disavow his favour. Since Jason has no children, the terms of the trust will send the assets to Sally. Remember, like releasing water from a dam, it is necessary to draw the course of the river to know where it will go.

Of course, if Mary wanted to get the property only for Sally, she would have to rely on the expectation that Jason would repudiate after Mary did. Jason will not be legally obligated to do so.

A disclaimer can be a great way to achieve a client’s goals. Sometimes it can be very difficult and requires thought to achieve the desired result. Sometimes more than one disclaimer may be necessary to achieve a client’s goals. Remember to chart the course of the river before releasing water from the dam and follow the rules of Section 2518 to obtain a qualified disclaimer.

Stephen C. Hartnett, JD, LLM
Education Manager
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128
www.aaepa.com

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