Disclaiming Property Part I: Federal Disclaimer

Jamie Held explained that the benefit of disclaimer planning is to utilize “…both spouses’ estate tax exemption amounts in order to minimize or eliminate estate tax on a couple’s accumulated wealth.” As we have mentioned often, the current federal estate tax exemption limit is $5 million. However, this exemption limit is set only until the end of 2012 as of now.

If your spouse predeceases you and you may need to disclaim property, Internal Revenue Code §2518 outlines the requirements to properly disclaim property for tax purposes.  The requirements are as follows:

1. The disclaimer must be completed no later than 9 months after the date of the decedent’s death (or if the transfer is by gift, 9 months after the date of transfer).
2. The person disclaiming the property (the “disclaimant”) cannot accept any interest in the disclaimed property or any of its benefits.
3. To actually disclaim the property, the disclaimer must be in writing, describe the property interest that is being disclaimed and be signed by the disclaimant. Currently there is no method to submit the disclaimer with an electronic signature.
4. The disclaimer must be unconditional, meaning it must be irrevocable and unqualified. There cannot be any “if” or contingency provisions included in the disclaimer.
5. The written disclaimer must be delivered to the transferor of the property interest, the legal representative of the transferor, e.g. the personal representative or the trustee, or the holder of the legal title to the disclaimed property.
6. Lastly, the disclaimed property must then pass to another recipient/beneficiary but cannot do so by any direction of the disclaimant.

When a disclaimer is completed properly, the transfer of the property is not considered a gift made by the disclaimant but rather completely bypasses the disclaimant and is directed to another recipient. You can read more about the benefit of using disclaimer planning in your estate plan in Jamie Held’s article Incorporating Flexibility in Uncertain Times.

As a reminder, if you believe a disclaimer is appropriate, be sure to contact your tax, financial or legal advisor before accessing any of the potentially disclaimed property. If you fail to do, you may not be able to continue with making the disclaimer.