What is a Qualified Disclaimer and How to Make One?

Overview:

In the estate planning or taxation context, a disclaimer is the refusal to accept property that would otherwise be transferred to by gift or inheritance. Disclaiming often plays an instrumental role in implementing a sound estate planning strategy. A person may wish to disclaim property for a number of reasons, including:

1) reducing estate taxes through, among other things, maximizing use of a deceased spouse’s exemption (no portability of unused exemptions in some states, such as Washington);

2) asset protection if the disclaimant has creditor problems

3) the property may be burdensome to maintain.

Gift Tax Issues Raised By Disclaimer:

Internal Revenue Code (I.R.C.) § 2511 imposes a gift tax on transfers of property, “whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible…”. Disclaimed property, if done incorrectly, would fall under § 2511 as an indirect transfer of property by claimant (disclaimant is transferring his/her interest in property to other beneficiaries whose inheritance will increase because of the disclaimer). Qualified disclaimer may avoid this.

A qualified disclaimer means an “irrevocable and unqualified refusal by a person not to accept an interest in property.” I.R.C. § 2518(b). A qualified disclaimer will be recognized only if:

Refusal is in writing;

Refusal delivered to transferor (or legal representative such as trustee or executor) no later than 9 months from later of:

“the day on which the transfer creating the interest in such person is made”; or

The person’s 21st birthday;

The person has not accepted the interest or any of its benefits; and

As a result of the refusal, the interest passes without direction of the person making the disclaimer and passes either:

To the surviving spouse or to someone other than the person making the disclaimer.

If a qualified disclaimer is timely made, the I.R.C. will treat the disclaimed interest as having never been transferred to disclaimant for purposes of federal estate, gift and generation-skipping tax purposes I.R.C. § 2518(a); Treas. Reg. § 25.2518-1(b). Instead, it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. Accordingly, a person making a qualified disclaimer is not treated as making a gift. Id.

Other rules governing disclaimers exist, and do other examples of disclaimer techniques that may benefit one’s estate planning strategy. The rules are complicated and circumstances vary. Under no circumstance should one decide to disclaim or attempt a disclaimer without consulting an attorney.

Call our Law Offices of Christopher R. Chicoine, PLLC to discuss your estate planning needs. We can be reached at 425-243-4158 or via email crc@chrischicoinelaw.com