Disclaimer
Planning
A qualified disclaimer lets a beneficiary refuse property so it passes as if they had died first, with no gift. It is one of the few ways to rewrite a plan after death, and it has to be done within 9 months, before any benefit is accepted.
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The effect of a qualified disclaimer
A qualified disclaimer under IRC 2518 lets a beneficiary refuse property so that, for federal estate, gift, and GST tax purposes, the interest is treated as never having been transferred to the disclaimant. It passes as if the disclaimant had predeceased, and the disclaimant is not treated as making a gift. Disclaimers are one of the few tools that let a plan be rewritten after death, within a short window.
IRC 2518
What makes a disclaimer qualified
| Requirement | What it means |
|---|---|
| In writing | An irrevocable, unqualified refusal, signed and identifying the interest disclaimed |
| Delivered within 9 months | Received by the executor, trustee, or holder of title within 9 months of the transfer (for an inheritance, the death), or of turning 21 if later |
| No benefits accepted | No use of the property, income from it, or direction over it before disclaiming |
| No say in who gets it | The property passes under the will, trust, beneficiary form, or state law, as if the disclaimant had died first |
| Surviving spouse exception | A spouse may disclaim into a trust that still benefits the spouse, such as a credit shelter trust |
Technical points that decide validity
- Timing: the 9-month period generally runs from the date of death for testamentary transfers. For joint tenancy with right of survivorship, the survivor generally has 9 months from the co-owner’s death to disclaim the survivorship interest.
- Acceptance: accepting income, using the property, pledging it, or directing its disposition is acceptance. Acting as executor or trustee to preserve the property is not, and taking the year-of-death required distribution from an inherited IRA does not by itself prevent disclaiming the balance (Rev. Rul. 2005-36).
- Partial and formula disclaimers: an undivided fraction or a pecuniary amount can be disclaimed, and formula disclaimers can target a result, such as fully using an exemption.
- Powers: a power over property is treated as an interest in property and can be disclaimed separately.
- Transfer-type disclaimers: under 2518(c)(3), a timely written transfer of the entire interest to the person who would have taken it can qualify even if state law does not recognize the disclaimer.
- State law: the state’s disclaimer statute sets its own form, filing, and timing rules, which must be met for the property to actually pass.
Planning uses with a $15 million exemption
- Spousal disclaimers into a credit shelter trust: the surviving spouse disclaims part of an outright bequest so it passes to a bypass trust that still benefits the spouse, using the first spouse’s GST exemption, which is never portable, and state estate tax exemption, which usually is not.
- Disclaimers by children: property passes to the next taker, often grandchildren. Because the child is living, the transfer can be a direct skip from the decedent, so GST exemption allocation needs to be addressed.
- Charitable disclaimers: property that passes to charity because of a disclaimer qualifies for the estate’s charitable deduction.
- Inherited IRAs: a disclaimer can move an account to a younger or eligible designated beneficiary, or away from a beneficiary in a high bracket. The beneficiary determination date for payout purposes is September 30 of the year after death.
Limits and risks
- Federal tax liens: a disclaimer does not defeat a federal tax lien against the disclaimant (Drye v. United States, 1999).
- Means-tested benefits: a disclaimer can be treated as a transfer for Medicaid eligibility, and some states treat it that way for creditors.
- No control: the disclaimant cannot choose the recipient; if the next taker under the instrument or state law is not who the family intends, a disclaimer does not work.
- Income tax: income in respect of a decedent, like an IRA, follows the property to the person who takes it.
What we handle
- Identifying who takes each asset if a beneficiary disclaims, under the instrument, beneficiary designations, and state law
- Modeling estate, state estate, GST, and income tax results of full, partial, and formula disclaimers
- Coordinating the disclaimer with the Form 706, QTIP and portability elections, and GST allocations
- Tracking the 9-month deadline and documenting that no benefits were accepted
- Working with counsel on the disclaimer instrument and state filing requirements