Do You Really Want Your Entire Bequest?
Planning with Qualified Disclaimers
You cannot be forced to accept an asset. The law has devised a very specific way to say “no” to a portion or all of a proposed gift or bequest. This technique is called a “Qualified Disclaimer.”
To be “Qualified,” the disclaimer must be structured in a particular manner to meet the requirements of Federal and State law. The actual statutory and regulatory framework is very complex and fraught with pitfalls. However, the results of your properly prepared and executed “Qualified” disclaimer can sometimes be an economic miracle for your family.
Essentially, a “Qualified” disclaimer must be irrevocable and in writing. Also, you must disclaim the asset within nine months from the time you are entitled to receive it. You may not control the disposition of the asset in any way.
SOME PLANNING SCENARIOS:
Scenario 1: Fix a Defective Asset Allocation to Save Estate Taxes.
Beulah and Bertram were husband and wife, and together they had assets of approximately $5,000,000. Each had approximately $1,000,000 in his or her own name (separate assets,) and the balance of their assets were “joint.” They created “bypass” trusts for each other intending to take advantage of both of their $2,000,000 exemptions.
A bypass trust is a trust that you create for your spouse with assets equal to your estate tax exemption. She can be the sole beneficiary of the Trust, receive all of the income, and have the principal available to her for her support and health care. She can even be the Trustee. The trust assets should not be included in your spouse’s estate. This permits her to use her own exemption against her own assets. You cannot create a bypass trust with joint assets because they pass directly to your spouse.
Unfortunately, Bertram and Beulah’s lawyer Ewald Eagle Eye, Esquire bought his estate planning software at Westfarms Mall and never bothered to re-arrange their holdings, so that each of them would own sufficient separate assets. Beulah died and was survived by Bertram and their sons, Bruno and Boniface.
If Bertram can disclaim $1,000,000 of the couple’s $3,000,000 of joint assets, then those disclaimed assets might be available to fund the “bypass” share to the optimum level of $2,000,000. This would probably save Bruno and Boniface an additional $500,000 in tax when their father “goes west.”
!!CAUTION:!! Disclaimers of “joint” assets can be a quite “tricky,” depending upon whether the assets are real or personal property, or whether securities are in certificate form or in “street name.”
Scenario 2: Keep Your Options Open.
Paul and Paula have total assets of $2,500,000. Their children Paulette and Pauline, are competent adults with stable marriages. If it weren’t for taxes, Paul and Paula would leave everything to each other. However, they know that the cost of doing that would be a Connecticut estate tax of approximately $127,000 and a Federal tax of about $27,500.
Paul and Paul divide their assets equally (not “joint”). They leave everything to each other but provide for an alternative disposition to the extent that the survivor disclaims any portion of her or his bequest.
Suppose that Paula survives Paul. Any assets which she disclaims would pass to a bypass trust of which she is trustee. She would receive all of the income and could use the trust assets for her support and health care. After her lifetime, the trust assets pass to Paulette and Pauline.
This “contingent bypass trust” must be put into place while both spouses are alive and competent. If one of them dies or becomes disabled, a significant tax saving opportunity could be lost.
Planning in advance to use disclaimers to create bypass trusts allows you to keep all of your options open. If, when the first spouse dies, your total assets are greater than the State or Federal estate tax exemption, then the survivor can create a bypass trust to the extent necessary to avoid the tax at her death. If the exemption is greater than your assets or if the estate tax has been repealed, you have a choice to take your entire bequest or to let part or all of it pass to a bypass trust in case the estate tax were to be reenacted.
Scenario 3: Take What You Want. Leave the Rest.
Your Aunt Sally left you all of her jewelry and a bequest of $200,000. If you didn’t survive her, those assets would pass to your children. You have a taxable estate (over $2,000,000) and want to have the cash pass to your children, who could really use it. If you took the cash and gave it to your children, you would have to use $200,000 of your exemption. This would eventually cost your family $100,000. You want to keep the jewelry. You disclaim the cash, which now goes to your children directly from your Aunt Sally. Since you didn’t disclaim the jewelry, it passes to you.
CONCLUSION
These are just a few of the ways in which disclaimers can save taxes, both during people’s lifetimes and in the administration of their estates. They can be used in many ways to achieve both tax and non-tax goals. For example, properly planned and executed disclaimers can save charitable deductions and allow beneficiaries of IRAs and other retirement plans to “stretch out” their minimum required distributions.