When a person inherits or is given a gift from a deceased person’s estate, they may refuse to accept it. This refusal is known as a “disclaimer.” In other words, a disclaimer is the legal term for an unconditional refusal to accept a gift or inheritance.
For gift and estate tax purposes, once a person makes a valid disclaimer, that person will be treated as if they had never received the disclaimed property. Thus, they will not owe any taxes on the gift because it was passed on to someone else.
As an example, suppose your aunt left you $5,000 in her will. If you refused to accept the money, then it would skip over you and go to the next or alternately named beneficiary in the will.
This may seem odd at first because why would someone want to disclaim a gift or inheritance? Well, the answer to this may be that if the gift is something of significant value, then it could increase the value of their estate.
What this means is that once the inheritor dies, they will have to pay additional federal taxes on their estate and they may not want to, so they disclaim the gift in order to shift that responsibility to someone else.
In addition, there are two important things to bear in mind about gift disclaimers:
- The first is that once a gift has been disclaimed, this refusal generally cannot be reversed to an acceptance. However, there are some very rare circumstances where a disclaimant (i.e., the person refusing the gift) may be able to change their minds. In contrast, once a gift has been accepted, then it can never be disclaimed later on.
- The second is that the disclaimer must be made after the testator’s (i.e., the person who creates a will) death. Any disclaimers made before this time will not be taken as valid.
What are the Elements of a Valid Disclaimer?
There are several requirements that need to be met before a disclaimer will be viewed as valid (i.e., legally enforceable) in the eyes of the law. In general, a valid disclaimer must include the following elements:
- The disclaimer must be in writing and that writing needs to:
- Identify the property being disclaimed (e.g., $5,000);
- Be written in terms that demonstrate a clear and unconditional refusal; and
- Be signed by the person refusing the interest in property (or their legal representative).
- The written refusal (i.e., disclaimer) must be delivered to the person transferring the property or their legal representatives.
- Delivery must occur within 9 months of the date of the creation of the interest (or if the inheritor is a minor, then no later than 9 months after they turn 21 years of age).
- The disclaimant must not have accepted any of the property interests or its benefits before making the refusal.
Additionally, the property interest must also be passed on to another party without any instructions from the person who is disclaiming the interest.
Can a Gift or Inheritance be Disclaimed in Part and Accepted in Part?
Generally speaking, a person who receives a gift or inheritance cannot disclaim part of it and then accept the rest. For instance, returning to the example from above about the $5,000 from an aunt, the inheritor could not accept half of the money (i.e., $2,500) and deny or disclaim the other half of it.
However, a person may be able to disclaim a gift or inheritance in part and accept them in part if they are the receiver of multiple gifts. For example, if the deceased gifts them a sum of money and a car, then the disclaimant will be allowed to accept the money and disclaim the car (or vice versa). This is because they are considered as two separate gifts.
Therefore, so long as the person is not attempting to partially disclaim and accept a single gift, then they may be able to choose which portions of the inheritance they want to keep and which gifts they wish to reject.
How Can a Disclaimer be Used to Reduce Estate Taxes?
One situation in which the use of a disclaimer can help save on estate taxes is when a person who dies leaves everything to their spouse and nothing to their children.
Since inheritance that passes to a spouse is not included in the taxable estate of the deceased, such an arrangement will essentially create a tax exemption on the estate taxes.
In this scenario, the spouse may disclaim their inheritance up to the amount of the estate tax exclusion, so that some portion of the deceased’s estate may be passed on to their children tax free.
Do I Need to Hire an Estate Planning Attorney for Help?
Consulting with an attorney who has experience in estate planning is the key to drafting an estate plan that is sensitive to both your needs and those of your loved ones. An estate planning attorney will know which type of will or trust is right for you, and will do their best to limit your tax liability.
Also, if you are the receiver of an inheritance or a gift that you would like to disclaim, an attorney can assist you with this process as well.