Using a qualified disclaimer as a post-mortem planning tool
By Russ Towers, JD, CLU, ChFCMr. Towers is vice-president, business and estate planning with Brokers’ Service Marketing Group in Providence, RI. Connect with him by e-mail: email@example.com
Sometimes estate plans look good while an estate owner is alive, but not so good when an estate owner dies. Often, combined federal and state estate taxes can be reduced by using a “post-death” planning device known as a Qualified Disclaimer.
Middle generation children may not need the inheritance left to them by a recently deceased older generation parent. Instead, a qualified disclaimer might be used to pass these assets directly to their own children (grandchildren of the deceased) to save estate taxes on their own estate. And sometimes the way titles are held on assets will provide an inefficient use of the marital deduction and estate tax exemption at the first death. A qualified disclaimer might be used to correct this imbalance.
Virtually any type of property title and asset distribution may be disclaimed:
- a distribution of probate property received through a will may be disclaimed
- an intestate (no will) distribution may be disclaimed
- a distribution from a revocable living trust may be disclaimed
- a surviving owner of jointly owned property can disclaim
- the primary beneficiary of a life insurance policy or annuity contract can disclaim in favor of the contingent beneficiary
- the primary beneficiary of a qualified retirement plan or IRA can disclaim in favor of the secondary beneficiary.
In other words, the person disclaiming will be treated as having predeceased the property owner. This disclaiming person will be treated as never having received ownership of the property for income, gift, or estate tax purposes as long as a successful disclaimer is executed.
Requirements for a successful disclaimer under IRC Section 2518
The disclaiming person will need to consult their attorney to draft the appropriate disclaimer document which conforms to the following requirements:
1. The disclaimer must be an irrevocable and unqualified refusal to accept an interest in the property
2. The disclaimer must be in writing
3. The writing must be delivered to the legal representative of the deceased transferor (i.e. executor/trustee) … or the legal contract holder (i.e. insurance carrier / qualified plan trustee / IRA custodian) … or the transfer agent by operation of law (i.e. jointly owned account like a bank account or mutual fund) … or jointly owned real estate (i.e. registry of deeds).
4. The written document must be delivered not later than 9 months after the deceased transferor’s death.
5. The person making the disclaimer must not have accepted the property disclaimed or any of its benefits.
6. The property interest must pass to another person without any direction on the part of the person making the disclaimer
Example of qualified disclaimer for life insurance
Mrs. Citizen (widow) purchases a $1,000,000 no-lapse UL policy on her life. She wants her adult child to the primary beneficiary of the policy and the trust she has created for her two grandchildren to be the contingent beneficiary. The adult child has had a very successful professional practice and she has already accumulated substantial wealth. Upon the death of Mrs. Citizen, what options does the adult child have to distribute the tax free insurance proceeds?
- The adult child can choose to receive the $1,000,000 of tax free insurance proceeds for themselves. This would tend to increase the gross estate of the adult child and may eventually expose the funds to future federal and state death taxes approaching 50% ($500,000).
- The adult child can execute a written qualified disclaimer with the carrier in favor of the contingent beneficiary (trust for the benefit of the two grandchildren). This would mean the $1,000,000 of tax free insurance proceeds would not be part of the future gross estate of the adult child for estate tax purposes and potentially save $500,000 of estate taxes at the future death of the adult child
Example of qualified disclaimer for an IRA
Mrs. Citizen was the beneficiary of a $1,000,000 IRA at the death of her husband. She executed a “spousal rollover” into an IRA in her own name. She wants her adult child to be the primary beneficiary of the IRA and a separate share trust she has created for her two grandchildren to be the contingent beneficiary. The adult child has had a very successful business and he has already accumulated substantial wealth. Upon the death of Mrs. Citizen, what options does the adult child have to distribute the IRA as an “inherited” stretch payout?
- The adult child can choose to receive the IRA payout as required minimum distributions (RMDs) over his own life expectancy based on the Single Life “inherited” table. These payments would be taxable income to him over his remaining life expectancy.
- The adult child can execute a written qualified disclaimer with the IRA custodian in favor of the contingent beneficiary (trust for the benefit of the two grandchildren). This would mean the RMDs of the “inherited” IRA payout could be stretched over the remaining life expectancy of the grandchildren based on their age using the Single Life “inherited” table. The RMDs would be paid to the trust each year and then distributed by the trustee to the grandchildren as K-1 trust income.