“There are several reasons why a beneficiary might disclaim a bequest,” Theodore Hughes and David Klein explain in The Executor’s Handbook. Those reasons include:
- Another survivor has a great need. (If Robert Smith’s brother leaves him $100,000, and Robert doesn’t accept the money, it goes to Robert’s daughter Jennifer, who needs it more than Robert does.)
- An heir owes money to creditors, who will simply grab the inheritance as soon as he receives it. By disclaiming, he takes the money out of the creditors’ reach.
- The heir is elderly and financially self-sufficient. He/she does not want to inherit assets that would go to his or her own heirs, anyway.
- To reduce estate taxes. Any property that is disclaimed by a beneficiary is never legally owned by that person and cannot be taxed upon his/her later death.
- To fine-tune gifts. Disclaimers allow beneficiaries to make adjustments and avoid problems of owning a piece of property or a business together, where one might need to come up with cash to buy out a co-owner.
- To allow beneficiaries to make adjustments for unforeseen circumstances. An example Denis Clifford offers is children who disclaim an inheritance from their father to help their widowed mother have more financial resources.
This saying “No Thank you” involves certain rules, we caution our estate planning clients. Federal law requires disclaimers to be “qualified”, which means:
- The disclaimer must be in writing.
- The disclaimer must be completed within nine months of the death (if the heir is a minor, the disclaimer must be done within nine months of that minor reaching age 21)
- The person doing the disclaiming may not first benefit from the property
- The person doing the disclaiming cannot direct where the gift goes (the deceased’s will or trust document will dictate that)
Are all disclaimers done “after the fact”, initiated after the person who created the will or trust has died? Not at all, says Denis Clifford. In fact, he advises, “You might help your inheritors by directly incorporating your wishes concerning disclaimer of gifts into your estate plan.” There are two important reasons for doing so:
- Including a clause permitting beneficiaries to disclaim gifts tells them you know about this option. “That way,” Clifford points out, “a beneficiary does not need to worry about going against your desires.”
- Not all beneficiaries or even executors know about disclaimers, so authorizing them in your documents is a way of alerting your heirs that this is a choice they may make.
One caveat about disclaimers is that the law doesn’t allow trustees who have any power to allocate or distribute trust income or principal to disclaim. If one of the beneficiaries is also the trustee, that might cause the IRS to consider the disclaimer invalid.
– by Rebecca W. Geyer