Magazine article The CPA Journal

Disclaimers and Financial Planners

Magazine article The CPA Journal

Disclaimers and Financial Planners

Article excerpt

One of the most dramatic ways the financial planner can provide service for the postmortem estate is to analyze whether a disclaimer will result in an advantage to the estate, the surviing spouse, or other beneficiaries. A disclaimer is an irrevocable and unqualified refusal by a person to accept an interest in property or benefits that are conferred by will or operation of law.

A disclaimer can be used to save taxes for the estate of the deceased and the estate of the surviving spouse. These savings can be used to improve the lifestyle of the survivors of the deceased. The disclaimer can also be used to make tax-free gifts and to revise the disposition of interests after the decedent's death.

One way to understand disclaimers is to look at examples of areas that would not qualify as disclaimers. If a beneficiary obtains an interest in property and later surrenders or gives up that interest, this would be an example of a relinquishment and would be treated for tax purposes as a gift by the party performing the relinquishment. Similarly, when a beneficiary surrenders an interest received from an estate for another interest, this is generally treated as an exchange and may give rise to a taxable transaction. Finally, if a beneficiary is permitted to select among various interests in an estate, there is no disclaimer.

IRC Sec. 2518 and Treasury Reg. Sec. 25.2518 provide the authority and guidance for disclaimers. In order to have a valid disclaimer, the following conditions must be met:

* The refusal must be in writing;

* It must be received no later than nine months after the later of (a) the day of the transfer creating the interest or (b) the day in which the disclaimant attains age 21;

* The disclaimant must not have accepted the interest or any of its benefits; and

*The interest must pass without any direction on the part of the disclaimant. There may be additional requirements for disclaimers under state and local laws and, in some instances, there is a limitation as to the type of property that can be disclaimed.

The usual situation where a disclaimer can be a useful postmortem planning technique is to take advantage of the unified credit in the first spouse's estate.

Example: The husband dies with an estate of $1.2 million. Under the will, all property passes to the surviving spouse who has no assets of her own. While there will be no Federal estate, tax on the husband's death due to an unlimited marital deduction, the wife will have a taxable estate of $1.2 million of which the first $600,000 will pass tax free due to her unified credit. …

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