Improper, or simply lack of, estate planning, such as, excessive assets held in joint tenancy, overfunded marital bequests, or a significant change in circumstances (e.g., winning the lottery), may require eleventh-hour or post-mortem estate planning to achieve desired federal estate tax savings, an equitable distribution of property interests upon death, or other estate planning goals. The qualified disclaimer may be of use in such instances.
There are only a few rules for disclaimers, but every disclaimer must strictly comply with those rules. Disclaimers must be written, unconditional and irrevocable refusals to accept benefits upon death and must be made within nine months of the decedent’s death. The person making the disclaimer must not have received any benefit whatever from the disclaimed asset prior to the disclaimer.
A disclaimer may be considered for the following purposes:
To take full advantage of the estate tax exclusion amount. If spouses hold all assets in joint tenancy, the survivor automatically succeeds to the ownership of 100% of the joint tenancy assets tax-free because of the unlimited spousal marital deduction. Thus, the $1,500,000 estate tax exemption (in 2004 and 2005) will be lost in the estate of the first to die. The survivor, however, can make an election to disclaim a portion, or all of the assets if the survivor already owns $1,500,000 of assets in his or her own name, so as to ensure full use of the exemption in the estate of the first spouse to die. Under those circumstances, the disclaimed joint tenancy assets will pass under the residuary clause of the deceased spouse’s will or trust, or, if none, according to the intestacy statutes of the state in which the decedent was domiciled. If the surviving spouse is named as an income beneficiary under a deceased spouse’s will or trust’s residuary clause, the surviving spouse can still enjoy the income from the disclaimed joint tenancy assets as well as preserve the exemption in the decedent’s estate and, of course, the $1,500,000 exemption in the estate of the survivor.
To correct a defect in the marital bequest. If the marital bequest in a trust or will might not qualify for the marital tax deduction because a person other than the surviving spouse holds a disqualifying interest in the property, the non-spouse could disclaim the interest and thereby salvage the marital deduction.
To avoid the termination of an S election. If a decedent’s S corporation shares will pass to a trust that does not qualify as a shareholder of S corporation shares, a qualified disclaimer by those persons whose interest in the trust would otherwise cause disqualification could prevent the termination of an S election.
There are numerous other circumstances in which a qualified disclaimer may be used to rescue an error or to accommodate changed circumstances in an estate plan. While some estate planning oversights can be remedied by the use of disclaimers, we recommend a properly prepared and frequently reviewed estate plan. Telephone us if you are faced with the prospect of having to disclaim certain assets to remedy changed family circumstances or to save the full amount of the estate tax exemption in a deceased’s estate.