Use the disclaimer to achieve client goals

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 first of two articles regarding disclaimers. This first article covers the basics of a disclaimer and a quick example. The second article deals with a more complex “double disclaimer” and an example of this situation.

“Qualification Disclaimer” is made by law. It is found in Section 2518 of the Code. If you meet the requirements, the disclaimer will be treated as having pre-deceased the deceased and is not considered a gift by them and will not use any of the previous recipient’s gift / estate tax exclusions.

Section 2518 has several requirements:

  1. The refusal must be in writing,
  2. The refusal must be received by the transferor of interest (or representative or holder of legal title) within 9 months of the date of death or when the deed that created the transfer becomes irrevocable (or the date the recipient reaches the age of 21),
  3. They must not have accepted any of the benefits of the property, and
  4. The interest shall pass without direction to the spouse of the deceased or any person other than the assignee.

Let’s look at a quick example:

Dadi leaves a will leaving Blackberry to John. The terms of the will state that if John dies previously of a criminal, the will goes to John’s daughter, Betty. Blackacre has a net worth of $3 million. John has already used all his exclusion. He would like to see Blackberry go to his daughter Betty. If John Blackacre accepts and presents a gift from him to Betty, he will make a taxable $3 million gift, which will incur a $1.2 million gift tax. If John makes a qualified disclaimer in time, Blackacre will pass as if John were a deceased grandmother. Since Granny’s Will states that the property would pass to Betty if he had previously passed away from her, this would fulfill John’s wishes without having to direct where to go. This saves John $1.2 million in these circumstances.

If you are considering a disclaimer, it is critical to determine where the disclaimed property will go after the disclaimer. Sometimes this can be very complicated. But it is absolutely necessary because the disclaimer has no control over it. It’s a bit like releasing water from a dam. You have to know the course of the river before you release the water. Sometimes it may be possible to change the course of the river by a double disclaimer or other mechanism.

After you are confident that the disclaimed property will go to its intended destination, it is necessary to follow the requirements of Section 2518 characters. For example, it is impossible to get an extension on the 9-month deadline for a disclaimer. It doesn’t matter if the disclaimer is sick or has extenuating circumstances. The deadline cannot be changed.

The next article in this two-part series will examine a double disclaimer and how this can work to achieve client goals.

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

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