The disclaimer option is a commonly overlooked yet powerful postmortem estate-planning vehicle available to most beneficiaries, personal representatives and other appointed executors. By definition, a disclaimer is a refusal by a beneficiary to accept a specifically designated asset, allowing for more flexibility in the transfer of assets upon an individual’s death.
In my opinion, the use of the disclaimer will only continue to gain popularity as numerous “sunset provisions” loom over favorable estate planning tax laws that originated from the Economic Growth and Tax Relief Reconciliation Act of 2001. The increasing uncertainty in tax law at the time of a decedent’s death could open the door to increased disclaimer use.
There are many potential opportunities for utilizing a disclaimer–let’s take a look at a few general scenarios:
? Spousal beneficiaries may wish to disclaim assets in order to let property pass to a contingent beneficiary, in most cases children or grandchildren. Doing so allows for the maintenance of the applicable estate tax exclusion and thus avoids possible unnecessary estate taxes.
? Disclaiming is commonly used when a parent seeks to pass assets to the next “in-line” beneficiary after receiving a large inheritance, generally from his or her parents or grandparents.
? Possibly the most broadly applied use of the disclaimer is when an unrelated individual wants to make tax-exempt gifts to a remaining contingent benefactor. As broad as the application may be, the use of disclaimer in this instance is quite specific and situational.
How does one apply a disclaimer? First, it must ultimately be considered qualified, which means a few conditions must be met. The disclaimer must be irrevocable and unconditional; it must also be written, specific, signed and delivered within a 9-month period.
Furthermore, the disclaiming beneficiary must not have incurred any acceptance of benefits from the assets, and the assets must pass without direction or discretion on behalf of the disclaiming party. It is also important to note that state laws control disclaimer requirements and they may vary among states.
Under disclaimer provisions, some possible situational disclaiming applications include disclaiming less than one’s entire interest, disclaiming qualified plan benefits and the disclaiming of property and powers by fiduciaries.
It’s important for advisors to be aware of the situational applications of disclaiming. Certain application options allow financial professionals to distinguish themselves in effective estate planning design. For example, a recent private letter ruling allowed for the following disclaimer strategy, using a disclaimer trust:
A father passed away and was survived by two daughters. A will left by the decedent called for securities he held in his estate to be placed into a trust for the clearly defined benefit of his two children. As a result of careful estate planning, each daughter had the option to disclaim the share of her interest in the securities left by her father. The property could then be distributed to a private foundation, which could be established by a disclaimer from either daughter.
Both daughters established qualifying private foundations with investment policies for maintenance of disclaimed funds. The daughters then proposed to disclaim interests held in equities passing to each of them through the established trust. Because of the proposed disclaimers, the property would pass to each beneficiary’s foundation. In addition, the securities passing to the foundations as a result of qualified disclaimers qualify for the estate tax charitable deduction.
A qualified disclaimer, in which a charity is the clearly defined contingent beneficiary, provides for a flexible estate planning strategy and the pursuance of charitable inclinations. Furthermore, as in the scenario above, a disclaimer can double as a means of securing any applicable estate tax exclusion when the estate is valued above the current exemption amounts.
Advisors should be aware of the adverse effects of not meeting disclaimer provisions. If a surviving spouse recipient does not wish to receive an asset or any income that may come as a result of receiving that asset and decides to disclaim, it must be done in a timely manner–usually within 9 months.
Consequences to avoid
Furthermore, he or she must not take any benefit in the meantime as a result of the potentially inherited property. If either point is violated, the disclaimer is invalid. Violating disclaimer qualifiers is a serious matter and professional advice should be sought prior to making a decision. If there is any chance the IRS might view the disclaimer as untimely or ineffective, the client risks litigation or other expensive liabilities associated with state or federal gift and estate tax regulations.
Advisors should thoroughly consider the advantages and effects of disclaiming in the estate planning process and provide for the ability to disclaim in pertinent documents and situations. While a disclaimer may increase the complexity of the estate plan, taking the time to examine this option at the beginning of the estate planning process can save beneficiaries time and money when disclaimer options and strategies are carefully set in place.
Daniel Pegg is senior sales consultant of the Retirement and Wealth Strategies Group at Jackson National Life Insurance Company, Denver, Colo. You can e-mail him at