Private Client Services Update – The Special Opportunities for Disclaimers in 2010
By Robert C. Goodman Jr., Sarah E. Messersmith, Estate, Trust & Wealth Transfer
For families of decedents dying in 2010, while there is no federal estate tax, disclaimers can be an especially useful tool.
A disclaimer is the refusal to accept an interest in property which the recipient would otherwise inherit from a decedent, either under the decedent’s will or trust or pursuant to the laws of intestacy. The disclaimed interest passes according to the provisions in the decedent’s will or trust addressing disclaimed property, if any. Otherwise, the disclaimed interest passes by law as if the disclaimant predeceased the decedent. The language of the will or trust (if any) and the family relationship between the decedent and the disclaimant determine who will receive the disclaimed assets. Typically, but not always, a disclaimer results in the disclaimed assets passing to the disclaimant’s heirs at law.
Here is an example of why a disclaimer could be especially useful in 2010. Assume that a decedent died in April of 2010 with a will or trust leaving his or her entire estate of $15,000,000 (net after expenses) to his/her two children in equal shares, per stirpes. If the decedent had died in December of 2009, the federal estate tax would have been approximately $5,175,000 (calculated at 45% of the amount of the estate, less an exclusion amount of $3,500,000). Therefore, each child anticipated receiving $4,912,500 if their parent died prior to January 1, 2010. The fact that the decedent died after January 1, 2010, and that there was no estate tax, results in the child receiving $7,500,000 instead, which includes a $2,587,500 ‘windfall’ each.
Due to the windfall, one or both of the children might want to disclaim a portion of his or her parent’s inheritance and let that portion pass to his or her children. As the law stands now, this would result in reducing the child’s estate without any adverse estate or gift tax consequences to the child or the child’s estate.
If the child only wants to execute the disclaimer if the parent’s estate will truly not be subject to federal estate tax (because of concern that Congress may reimpose the estate tax retroactively) the child has the option to ‘wait and see’ for up to 9 months. The potentially disclaimed assets should be segregated and the child must not accept the assets or their benefits. The assets may be held for up to 9 months from their parent’s date of death while we monitor Congress to see if a bill is passed creating a retroactive federal estate tax or (more likely) an option to choose between current law (with limited basis step-up) and the new law (with presumably full basis step-up). For the disclaimer to be valid under Federal Estate Tax Law, before the end of 9 months, the child must execute and deliver a disclaimer.
To be effective, a disclaimer must be in writing, signed by the disclaimant and ‘delivered or filed’ in a certain manner pursuant to Virginia law. Once an effective disclaimer is made, the disclaimer is irrevocable. It takes effect as of the time that the decedent’s will or trust became irrevocable, or, if the decedent died intestate, at the time of the decedent’s death. The Internal Revenue Code also applies and states that to be effective for federal tax purposes, a disclaimer must be an irrevocable and unqualified refusal by the disclaimant to accept an interest in property, evidenced by a writing which is delivered to the personal representative of a decedent.
The Virginia Code no longer imposes a time limit during which a disclaimant must make a disclaimer in order for it to be effective. However, the Internal Revenue Code requires that a disclaimer be made within 9 months after the decedent’s date of death (or if the disclaimer is being made by a young person, the longer of 9 months after the decedent’s date of death or the disclaimant’s 21st birthday).
However, a disclaimer is barred if the disclaimant ‘accepts’ the interest sought to be disclaimed or any of its benefits. Actions such as re-titling an asset into the disclaimant’s name, use of some of the funds by the disclaimant, or use of any earnings on the asset would be considered ‘accepting’ the asset.
A client with a family member who passes away in 2010 should consider whether a disclaimer of a portion of his or her inheritance would be appropriate under his or her circumstances. For all clients, the personal/family implications need to be discussed. To make the decision in the case of a surviving spouse will require some mathematic/tax computation as well.
Robert C. Goodman Jr. is a partner at Kaufman & Canoles where he works closely with families and family businesses in generational and estate tax planning, other tax issues, family dynamics, and charitable objectives, in addition to his commercial transaction work. He is a graduate of Harvard Law School and his civic involvement includes service to Virginia Beach Vision, Virginia Beach Foundation, Eastern Virginia Medical School, EVMS Foundation, and the Diabetes Institutes Foundation. Rob can be reached at (757) 624.3238 or firstname.lastname@example.org.
Sarah E. Messersmith is an associate attorney at Kaufman & Canoles, where her practice focuses on wills, trusts and estates. She works in the firm’s Hampton office and can be reached at (757) 224.2950 or email@example.com.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.