A loved one has just left you a bequest—but should you accept it? You are now in the unique position of doing what is called “post mortem” planning. If you don’t need the assets, or there are tax savings or other advantages to be gained, it may make sense for you to refuse the bequest. You would do this via a qualified disclaimer. A qualified disclaimer allows the bequest to bypass you and go to the next beneficiary in line. There are many reasons why you might want to disclaim a bequest-- here are five:
- Estate and Gift Tax Savings. This is often cited as the main incentive for using a qualified disclaimer. In 2020, an individual can shelter a generous $11.58 million in assets from gift and estate tax. By maximizing portability of a spouse’sunused estate tax exemption, a married couple can effectively pass up to $23.16 million in 2020 to their heirs free of gift and estate taxes. The gift and estate tax exemption may be used to shelter transfers to non-spouse beneficiaries, such as your children and grandchildren, from gift or estate tax (transfers between spouses are sheltered by the unlimited marital deduction).
However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. Assuming you don’t need the money, if your children are next in line, a disclaimer lets you shift the disclaimed funds to them (bypassing taxation in your estate) without eroding your (or your spouse’s) exemption amount.Thus, by shifting the funds to the younger generation, a disclaimer can save gift and estate tax for the family as a whole(see discussion of GST tax below).
- Generation-Skipping Transfer (GST) Tax Optimization. Disclaimers may also be useful in doing some post-mortem planning for the GST tax. The GST tax is imposed on most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is $11.58 million for 2020.
For instance, if your parent’s estate plan did not make full use of your parent’s GST tax exemption, you could disclaim a portion of your inheritance so that it passes directly to your children. Your parent’s GST exemption amount (which may have otherwise been wasted) could be used to shelter the transfer from GST tax.
- To Benefit Charity. A disclaimer may be used to accelerate a gift to charity. For example, if your parent’s Will provides that a bequest to you passes to a charity in the event you disclaim all or any part of your interest, you may want to consider a disclaimer. If the disclaimed property passes directly to the charity, your parent’s estate will benefit from an estate tax charitable deduction. In this situation, disclaiming your bequest allows you to honor your parent’s philanthropic objectives while also reducing the taxable estate.
- Possible Asset Protection. If you have problems with creditors, any inheritance you receive would immediately be subject to the claims of your creditors. Because the disclaimed property never comes into your hands, it might be possible to avoid creditors’ claims by using a disclaimer to protect these assets. However, please note that this strategy may not always work. State and/or Federal laws (including bankruptcy laws)may prohibit you from using a disclaimer in this fashion. It is important to consult with an attorney about your specific situation before using a disclaimer to avoid creditors.
- Family Businesses. Disclaimers may be used to pass ownership of a family business to younger generations or to ensure that your family retains or gains control. In some instances, a disclaimer can get around the terms of a shareholders’ agreement or cause a sale or redemption of the business interests in a way that benefits your family.
Before you make a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, contact us and your trusts and estates attorney for guidance. You can reach me at AClapp@BerdonLLP.com or you can contact your Berdon advisor.
Ada Clapp is a Berdon LLP Senior Principal with more than 25 years of experience, as a trusts and estates attorney, wealth strategist, and family office general counsel, advising high net worth individuals, fiduciaries, and family offices on a wide variety of matters. She has extensive experience advising on sophisticated income, gift and estate tax planning, philanthropy, fiduciary advisory and trust administration, family governance and family office operations.