 Sometimes it pays just to say “no thanks” to a generous bequest—even from your own spouse. There may be estate planning benefits to having the assets go directly to contingent beneficiaries named by the decedent. If those beneficiaries are your children, this strategy could help them keep more of the bequest.
Officially declining an inheritance involves executing a legal document known as a “qualified disclaimer.” This refusal, which can apply to all or part of a bequest, must be executed within nine months of the donor’s death and before you’ve received any income from the inheritance. While this is generally a reactive measure, similar results can be obtained setting up a disclaimer trust as part of your estate plan.
One factor in deciding whether to refuse an inheritance is the uncertain future of the federal estate tax. Repealed for 2010, it will be revived in 2011 under unfavorable conditions.
The amount of an estate that’s exempt from federal tax, which was gradually increased to $3.5 million for those who died in 2009, will drop back to $1 million for 2011, unless Congress enacts new legislation.
Also, after gradually being reduced to 45%, the top estate tax rate will return to 55%. The Obama administration and Congress will likely adjust the rules or change the timetable, but most experts expect the estate tax to continue to exist in some form. A qualified disclaimer or a disclaimer trust could help you prepare for whatever comes.
Suppose that under your current will, all of your assets are to go to your spouse if you die first, and vice versa. Then, at the death of the surviving spouse, the remaining assets will be divided among your children. With this arrangement, there’s no estate tax due after the first death—because a spouse can inherit an unlimited amount tax free—and the surviving spouse’s estate can be reduced, for tax purposes, by whatever individual exemption is in effect at the time.
But this wastes the exemption of the first spouse to die. Instead, the surviving spouse could disclaim an amount equal to the estate tax exemption, passing it directly to contingent beneficiaries. The first spouse’s exemption relieves the heirs of any current estate tax liability, and later the surviving spouse’s own exemption can be used.
Before disclaiming any assets, one’s current and future potential need for the disclaimed assets needs to be carefully analyzed by a financial planner, since this is an irrevocable decision. We can work with you and your attorney to consider whether turning down an inheritance might make sense for you, and help you follow the rules that govern the process.
Also, if your net worth nears or exceeds federal estate tax exemption limits, we can discuss how setting up a disclaimer trust now can benefit your heirs. |