Losing your spouse is one of the most difficult experiences you may face. Although it is important to give yourself time to grieve, there are also crucial steps you may need to take to address your spouse’s accounts and property and protect your own future.
If your spouse’s will or trust—or your joint trust—contains a disclaimer provision, one time-sensitive decision is whether to disclaim property you would otherwise receive.
A disclaimer means refusing to accept an inheritance or other property interest. This decision should not be made without reviewing the estate planning documents and obtaining legal and tax advice. A qualified disclaimer is irrevocable, and strict deadlines apply.
What Is a Disclaimer Provision in a Will or Trust?
A disclaimer provision explains what happens if a beneficiary refuses to accept money or property.
The provision generally identifies the person or trust that will receive the property after the original beneficiary disclaims it. The person making the disclaimer cannot simply redirect the inheritance to anyone they choose.
A disclaimer can provide flexibility after a death. It allows the surviving spouse and advisors to consider the family’s circumstances, tax laws, and the value of the estate at that time.
What Is a Qualified Disclaimer?
Under Internal Revenue Code § 2518, a qualified disclaimer is an irrevocable and unqualified refusal to accept an interest in property.
When a disclaimer satisfies the federal requirements, the disclaimed property is generally treated as though it had never been transferred to the person making the disclaimer. Instead, the property passes according to the will, trust, beneficiary designation, or applicable law.
The transfer to the next beneficiary is generally not treated as a taxable gift made by the person who disclaimed the property.
What Are the Requirements for a Qualified Disclaimer?
A qualified disclaimer generally must meet the following requirements:
- The refusal must be in writing.
- The writing must be delivered to the appropriate person within the required deadline.
- The person making the disclaimer must not have accepted the property or any of its benefits.
- The property must pass without the disclaiming person directing who will receive it.
- The disclaimer must satisfy applicable state law.
For a surviving spouse disclaiming an interest created at the spouse’s death, the federal deadline is generally nine months after the date of death.
There are exceptions and special rules, including rules for disclaimers by minors and certain interests received by surviving spouses. The correct requirements depend on the property and the terms of the estate plan.
Why Is the Nine-Month Deadline Important?
The nine-month deadline is strict. Waiting too long can prevent a disclaimer from qualifying for the intended federal tax treatment.
The surviving spouse must also avoid accepting the property or its benefits before making the disclaimer. Acceptance can be express or implied.
For example, withdrawing money, taking income, directing investments, or otherwise exercising control may interfere with the ability to disclaim the property.
Do not assume that you have nine months to begin reviewing the issue. The documents, assets, tax consequences, and state-law requirements must be evaluated well before the deadline.
Step 1: Locate the Estate Planning Documents
Your spouse’s estate planning documents are among the first sources of direction about what should happen next.
These documents may include:
- A will
- A revocable living trust
- Amendments to the trust
- Beneficiary designations
- A marital agreement
- Deeds
- Business succession documents
- Prior gift or estate tax returns
Your spouse’s will or trust contains the roadmap for how your spouse wanted money and property handled. Those documents were also likely designed in coordination with your own estate plan.
Find the Disclaimer Provision
A will or trust may specify how property should be distributed if the original beneficiary disclaims it.
The provision may direct the property to:
- A disclaimer trust
- Children or other descendants
- Another family member
- A charitable organization
- Another beneficiary named in the document
The wording matters. Before making a disclaimer, you must understand where the property will go and whether you may continue to receive any benefit from it.
Gather Account and Property Information
Your attorney will also need information about the property you may inherit.
Begin gathering:
- Bank and investment statements
- Retirement account information
- Life insurance policies
- Real estate records
- Business ownership documents
- Outstanding debts
- Prior tax returns
- Appraisals or valuation information
A disclaimer decision cannot be evaluated in isolation. Your advisors need to understand the complete estate and your own financial circumstances.
Step 2: Meet With Your Estate Planning Attorney
The legal process following a spouse’s death can be complicated. Because the disclaimer deadline is limited, schedule a meeting with your estate planning attorney as soon as reasonably possible.
Your attorney can review the documents and help determine:
- Whether they contain a disclaimer provision
- Which property may be disclaimed
- Who would receive the property
- Whether you have already accepted any benefits
- Which federal and state deadlines apply
- Whether a partial disclaimer is possible
- How the disclaimer would affect the rest of the estate plan
The attorney can also help you prepare and properly deliver the written disclaimer if you decide to proceed.
Consider the Federal Marital Deduction
Federal tax law generally permits property to pass to a surviving spouse who is a U.S. citizen without current federal estate tax because of the marital deduction.
However, property passing to the surviving spouse will often be included in that spouse’s estate at their later death.
A disclaimer may allow property to pass to another beneficiary or into a trust instead of being included in the surviving spouse’s estate. Depending on the plan, the surviving spouse may still be able to receive certain benefits from the trust.
This is one reason disclaimer provisions may be included in estate plans for married couples.
Consider Current Estate Tax Laws
Federal estate tax exemption amounts and state estate or inheritance tax laws can change. Some states impose taxes at levels far below the federal exemption.
A disclaimer decision should be based on:
- The law in effect when the spouse dies
- The deceased spouse’s taxable estate
- The surviving spouse’s assets
- Expected future appreciation
- Prior taxable gifts
- State estate or inheritance taxes
- The needs of the next beneficiary
- The terms of any disclaimer trust
Do not rely on exemption figures that were current when the will or trust was signed.
Consider Portability
Portability may allow a surviving spouse to use the deceased spouse’s unused federal estate tax exclusion.
To elect portability, the executor must generally file a timely and properly prepared Form 706 for the deceased spouse’s estate. The IRS explains that the deceased spouse’s unused exclusion becomes available only when the portability election is made.
Portability and a disclaimer are not interchangeable. They solve different planning problems.
Portability may reduce the need for a disclaimer in some estates. In other situations, a disclaimer may still be useful because of:
- State estate taxes
- Future appreciation
- Asset protection
- Control over the final beneficiaries
- Generation-skipping transfer tax planning
- The financial needs of other beneficiaries
Your attorney can help determine how these strategies work together.
Consider Nontax Reasons for a Disclaimer
A disclaimer is not useful only for estate tax planning.
A surviving spouse may consider disclaiming property because:
- The spouse already has sufficient assets
- The next beneficiary has a greater financial need
- The property would be better managed in a trust
- The family wants to preserve property for children or grandchildren
- Accepting the property would complicate another financial plan
- The property has liabilities or management burdens
- The disclaimer would better carry out the couple’s planning goals
The effect on every beneficiary should be reviewed before a decision is made.
Step 3: Include Financial and Tax Professionals
In addition to your attorney, include your financial advisor, accountant, and other appropriate tax professionals in the discussion.
Your advisory team can help determine:
- The value of the property you may inherit
- The value of your own estate
- The property’s income tax basis
- Expected growth or income
- Whether portability provides adequate protection
- How the disclaimer would affect your financial security
- The tax impact on the next beneficiary
Evaluate the Effect on Your Family
A disclaimer changes who receives property. That change may affect several family members.
Questions to consider include:
- Will your estate face additional tax if you accept the inheritance?
- Who receives the property if you disclaim it?
- Will that person receive the property outright or in trust?
- Could the inheritance affect that beneficiary’s income taxes?
- Could it affect eligibility for means-tested public benefits?
- Does the next beneficiary have the financial judgment to manage it?
- Will the disclaimer create conflict among family members?
- Can you still receive support from a disclaimer trust?
Your advisors should evaluate both the immediate consequences and the long-term effect on your family.
Can You Disclaim Only Part of an Inheritance?
Federal law may permit a qualified disclaimer of an undivided portion of a property interest.
This can provide flexibility when a surviving spouse wants to accept part of an inheritance while allowing another part to pass according to the disclaimer provision.
However, the partial disclaimer must satisfy the applicable legal requirements. The surviving spouse cannot accept benefits from the portion being disclaimed or direct where that portion will go.
The documents must also provide an appropriate destination for the disclaimed interest.
Is a Disclaimer Irrevocable?
Yes. A qualified disclaimer is an irrevocable refusal to accept the property.
After making the disclaimer, you generally cannot change your mind and reclaim the property. You also cannot make the disclaimer in exchange for payment or another benefit.
That is why the estate plan, financial information, tax consequences, and effect on other beneficiaries must be reviewed before the disclaimer is signed and delivered.
When Should You Seek Legal Advice?
Contact an estate planning attorney promptly if:
- Your spouse’s will or trust mentions a disclaimer
- You are unsure where disclaimed property would go
- You have started receiving income or benefits from inherited property
- The estate may be subject to federal or state estate tax
- You are considering a portability election
- The next beneficiary has a disability or receives public benefits
- You want to disclaim only part of an inheritance
- The nine-month deadline is approaching
Disclaiming an interest in a will or trust may help achieve estate planning, family, or tax goals. It can also create unintended consequences if it is handled incorrectly.
At McDonald Law Firm, we can evaluate your circumstances, explain whether a disclaimer may benefit you and your loved ones, and help you meet the applicable deadlines.
Call Andre O. McDonald, a Howard County, Montgomery County, and District of Columbia estate planning, special needs planning, and Medicaid planning attorney, at 443-741-1088, 301-941-7809, or 202-640-2133 to schedule a consultation.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
