Insights

Qualified Disclaimers: When Declining an Inheritance Pays Off

11.01.23

The thought of turning down an inheritance rarely crosses most people’s minds, but under certain circumstances, the costs of receiving a gift can outweigh the benefits. The use of a qualified disclaimer can help avoid unanticipated consequences and add flexibility to an estate plan.

What is a Qualified Disclaimer?

A qualified disclaimer occurs when a beneficiary refuses to accept a gift, bequest, devise, or beneficiary designation according to the requirements of the Internal Revenue Code. To be valid, the disclaimer must meet three requirements:

  1. The disclaimant must not accept the property being disclaimed or any of its benefits and cannot direct where the property goes.
  2. The disclaimer must be in writing.
  3. The disclaimer must be made within nine months after the date of the transfer creating the interest (in many cases, nine months from the death of the donor).

Once a qualified disclaimer has been made, it is irrevocable, and the disclaimant will be treated as if they never received the gift in the first place. The property will simply pass to the next beneficiary without being considered a gift or transfer by the disclaimant. In certain cases, the next beneficiary will be the disclaimant via their interest as the beneficiary of the trust.

How are Qualified Disclaimers Useful in Estate Planning?

Qualified disclaimers can be beneficial to an estate plan in a few ways, including:

Estate Tax Reduction

The use of a qualified disclaimer can result in the reduction or elimination of estate tax in several instances. For those with large estates, the use of a disclaimer can help control the size of their estate. For married couples, a disclaimer can be used by the survivor to direct an inheritance to their children instead of being included in their estate.

Flexibility

Changes in the law or to your personal situation make it difficult to create the perfect estate plan. The use of a qualified disclaimer can add to the flexibility needed to adjust your plan to account for these unforeseen changes. For instance, if you planned to give to your children, but the size of your estate decreases substantially, they can disclaim the assets so they will go to your spouse and preserve the intent of you plan. A married couple can also name a credit-shelter trust as a contingent beneficiary on a retirement plan to give the surviving spouse the option to disclaim. This strategy gives them the opportunity to take advantage of any unused portion of the deceased spouse’s estate tax credit while still providing for the survivor. Disclaimers can also be used to adjust a wealthy child’s share, give more to a beneficiary in need, or terminate a trust.

As always, please contact your advisor with any questions or concerns.


Authored by: Mike Ivan, JD, LL.M., Estate Planning Specialist, MAI Capital Management

Information updated as of 10.25.23

Please send your questions, comments, and feedback to: info@mai.capital. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

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