Sunday, September 9, 2012

What is a disclaimer?

As the last item shows, courts sometimes have to deal with disclaimer issues. A disclaimer is a process by which someone who inherits property can essentially say “no, thank you” and decline to accept it. This can be done with property passing by a will, a trust, or other non-probate procedures such as joint tenancy or beneficiary designations.

If property is disclaimed, it then passes to the person who would have received it if the disclaiming recipient had not been named. A very important point is that the disclaiming recipient cannot specify who is to receive the property. If B wants to have property pass to C instead of to himself, he must accept the property and then make a gift to C. This may well use up some of his lifetime gift tax exemption. 

Disclaimers can apply to only a part of a gift. If a will calls for B to receive $100,000, he can accept $50,000 (or any other figure) and disclaim the rest.

Disclaimers are governed by both state and Federal law. The Internal Revenue Code provides rules that govern “qualified disclaimers” for Federal estate tax purposes. Both the Federal and the state statutes provide that a person cannot disclaim property if he has accepted it, gained any benefit from it, or if he has accepted any consideration from another person in exchange for the disclaimer. 

Disclaimers can be useful tools in succession planning. An example: a client who has a retirement account may designate his wife as the primary beneficiary and his brother as the secondary beneficiary, with the plan that 
  • his wife will take over the account if she needs the money, but 
  • she will disclaim it if she doesn’t (if other accounts and property she receives are sufficient to meet her needs), and thus allow the account to pass to the brother instead.

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