Disclaimer Planning

Losing your spouse is one of the most difficult things you might face in life. While it is important to take time to grieve, there are some considerations following a spouse’s death that are time-sensitive.

If your spouse’s will or trust, or your joint trust, has a disclaimer provision, one of the time-sensitive decisions you will need to make is whether to disclaim money or assets for which you are named as beneficiary. In order to be effective, a disclaimer must be made within the time required by state and federal law.

Under the Internal Revenue Code (§ 2518), a qualified disclaimer is an irrevocable, unqualified refusal to accept a gift or bequest of a property interest. After the disclaimer, the interest in property passes to next person or entity entitled as beneficiary under the will, trust, or state law. A proper disclaimer is not considered a taxable gift from the first beneficiary to the next beneficiary in line.

A qualified disclaimer must meet the following requirements:

  • It must be made in writing as required by state law.
  • It must be made within nine months after your spouse’s date of death.
  • You must not accept the property interest or its benefits.
  • The interest must pass to someone other than you without any direction by you (the person who is disclaiming the interest).

There are several steps you should take to ensure that you make timely decisions and properly disclaim a property interest if you choose to do so:

Step 1: Locate the estate planning documents. Your estate planning documents are one of the key sources of direction about what should happen next. Your spouse’s documents should indicate what your spouse wanted to happen to their property and money, and they were likely designed in coordination with your own estate plan. A will or trust may include a provision specifying how particular property is to be handled if the original beneficiary disclaims their interest in it. Your estate planning attorney will need to have those documents to advise you about the best course of action.

Step 2: Meet with your estate planning attorney. The legal process following a loved one’s death can be complicated. Because of the limited time during which you must elect to disclaim accounts and assets, you will need to meet with your attorney as soon as you can. Your attorney will review your spouse’s estate plan with you and help you determine if it contains disclaimer provisions, and if so, whether you should consider disclaiming your interest in a will or trust and the effect of such a disclaimer.

Because of the unlimited marital deduction under federal tax law for US citizens, your spouse was permitted to transfer an unrestricted amount of accounts and property to you at any time during their life, or at their death, free of taxes. However, the transferred amounts will usually then be included in your estate. If you and your spouse had a large amount of wealth, using a disclaimer is one tax planning strategy as it takes advantage of the lifetime estate tax exemption.

Currently, the exemption amount is historically high. In 2023, the federal estate tax exclusion amount is $12.92 million for an individual and $25.84 million for a married couple. Only estates that exceed this amount are subject to estate tax. However, current law schedules the estate tax exclusion amount to be reduced by half at the end of 2025. If Congress does not make any changes to the law before then, more estates will be subject to estate taxes at that time. In addition, some states have their own estate or inheritance taxes that could apply to estates of a much lower value. If your estate is likely to be subject to federal or state estate taxes, disclaiming an inheritance may be a good strategy, especially if the beneficiary in line is less likely to be subject to estate taxes, or if the trust specifies that the disclaimed property can be transferred to another trust that will benefit you without being included in your estate.

One other factor to consider is that current law allows a surviving spouse to take advantage of their deceased spouse’s unused estate tax exclusion amount for subsequent transfers during life or at death.  An estate tax return that makes a portability election is required to exercise this option. For some estates, this planning approach can make a disclaimer unnecessary.

Your estate planning attorney will help you determine the best strategy to minimize your estate taxes and to consider whether a disclaimer may be useful to achieve other goals, such as providing the benefits of the trust to a next beneficiary who may have greater need for it than you.

Step 3: Include financial and tax professionals in the conversation. In addition to your attorney, involve your financial advisor, accountant, and other financial or tax professionals in the conversation. Your team of professionals will help you determine the value of the accounts and assets that you will inherit from your spouse, as well as the value of your own estate, to determine if a portability election will provide adequate protection or if disclaiming some of the accounts and property in your spouse’s estate or held in trust for your benefit is the better strategy. Your professional team will help you consider all the important variables, including the impact of a disclaimer on your family members. Will they have to pay estate tax at your death if you do not disclaim your interest in the trust? Will the beneficiary who receives the inheritance after a disclaimer be negatively impacted, for example, by increased income taxes if they receive trust income that pushes them into a higher tax bracket?

We Are Here to Help
Disclaiming your interest in a will or trust is a strategy that you may not have considered, but it may be a great way for you to achieve your estate planning and tax-savings goals. We can help you evaluate your unique circumstances to determine whether a disclaimer will benefit you and your loved ones, as well as assist you in meeting any approaching deadlines and avoiding possible pitfalls. Give us a call today to set up a meeting.