What is a disclaimer?
- A disclaimer is a refusal to take possession of an asset, and the legal equivalent of saying “no thanks, I don’t want this” to an inheritance. It is an action taken by the beneficiary of an estate or trust to formally give up their right to receive or take a beneficial interest in an asset (or assets) to which they would otherwise be entitled from an estate or trust.
- A beneficiary can disclaim all or a portion of anything they are earmarked to receive. They could disclaim their entire beneficial interest in an estate or trust, a percentage or specific dollar amount of their beneficial interest in an estate, or even simply a specific asset to which they are entitled by reason of their beneficial interest in the estate or trust.
What happens when a disclaimer is made?
- A disclaimer usually comes in the form of a written document, signed by the “would-be” beneficiary (also referred to as the “disclaimant”). A well-drafted disclaimer instrument should identify and be signed by the disclaimant, specify the interest that the disclaimant has in the estate, trust, or specific asset, and contain affirmative statements that the disclaimant irrevocably refuses to take the interest.
- If the would-be beneficiary is disclaiming an estate or testamentary devise (i.e. disclaiming an asset that was given to him/her via a Will or via the intestacy statutes), when the disclaimer is signed, the “would-be” beneficiary is treated as having predeceased the testator and the successor beneficiaries will inherit the disclaimed interest. (In a trust context, the disclaimant is treated as having predeceased prior to the moment in time that causes the interest to vest.)
What is the difference between a qualified disclaimer and a non-qualified disclaimer?
- Though the difference between a qualified disclaimer and a non-qualified disclaimer, is simple, the tax implications to the disclaimant can be dire: if a disclaimant executes a non-qualified disclaimer of an asset, they are treated as making a gift of the asset to the “next person in line” for the asset, whereas, if a disclaimant executors a qualified disclaimer, they are NOT treated as making a gift.
- This means that the disclaimant is treated for gift tax purposes as the transferor and will need to apply the gift tax rules to determine whether he or she made a taxable gift to the successor donee.
- The benefit of making a qualified disclaimer instead is the minimization of any gift tax consequences to that “would-be beneficiary”/disclaimant of due to the refusal to take the gift.