One benefit of being a volunteer coach on your teenager’s sports team is that you realize that it’s not just your teenage son or daughter who has the know-it-all attitude; it is ubiquitous among the teenage demographic. Just as our teenage children, in their less-than-laudable, give-me-a-break dad, eye-rolled responses, seem to look right through us parents as if we are invisible, the use of a legal disclaimer allows a beneficiary to be legally ignored for estate or trust administration purposes.
In this month’s update, I summarize the use of legal disclaimers for inherited assets.
Overview:
A disclaimer allows a beneficiary, called the “disclaimant,” to be considered dead for purposes of a trust or estate administration. The disclaimant must specify, in a writing called a “disclaimer,” which assets will be disclaimed. The disclaimed assets will then be distributed according to the deceased individual’s trust or estate as if disclaimant had died before the mother/father.
For example, if were receiving an inheritance from your mother, and you signed a disclaimer disclaiming $100,000 that you would have otherwise received from your mother when she died, the $100,000 in assets would be distributed according to your mother’s trust provisions as if you died before your mother. You cannot yourself direct the distribution of the disclaimed assets, but instead must allow for the disclaimed assets to pass according to the terms of your mother’s trust (e.g., to your children).
Tax Benefits:
While the use of a disclaimer can achieve other objectives,1 the most common objective of a disclaimer strategy is to save taxes. For example, if you already own significant assets, and you decide to disclaim assets, a disclaimer would likely save your family future estate taxes and income taxes.
- From an estate tax perspective, the disclaimed assets avoids any estate taxes on the disclaimed assets at your death. The disclaimed assets were never “owned” by you. Your disclaimer is not considered a “gift” to your children.
- From an income tax perspective, the disclaimer is likely to result in lower income taxes to your family. Over many years, the tax savings on an investment account taxed at your children’s lower marginal tax rates can be significant.
Legal Requirements:
Here are the specific legal requirements of a valid disclaimer:
- Before disclaiming the assets, the disclaimant did not take ownership or otherwise benefit from the assets;
- The assets to be disclaimed are specifically identified in a written legal document called a “disclaimer;”
- The disclaimer is irrevocable;
- The disclaimant is not receiving any compensation in return for disclaiming the assets;
- The disclaimant was not insolvent at the time of the disclaimer;
- The disclaimer document is signed within nine months of death; and
- The signed written disclaimer is delivered to the trustees of the decedent’s trust (if trust being administered) or the personal representative (if the estate is being administered).2
I’m told that teenage children will eventually appreciate their parents’ participation in their lives, even if they are ignored for now. In trust and estate situations when a beneficiary-parent “disclaims” assets, their children will financially benefit by reason of their parent being legally ignored.
1 If a beneficiary is about to endure a divorce, they might disclaim assets in favor of a child to avoid complications with inherited assets.
2 The Minnesota rules governing valid legal disclaimers can be found here: https://www.revisor.mn.gov/statutes/cite/524.2-1101