Disclaimer

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disclaimerWhen people set up beneficiaries for their IRAs, they don’t know what the future holds. Assume a simple situation where the the IRA owner has two heirs—a spouse and a child. The IRA owner names a spouse as the primary beneficiary and their child as the contingent beneficiary. However, this may not be good if years later, the family is wealthy and they seek ways to reduce their estate and accompanying estate taxes. Leaving the IRA to the spouse turns out to have been a bad idea—it would have been better to leave the IRA to the child and take advantage of the unified credit (the estate exclusion).

Here’s where the disclaimer comes in. The spouse who has been named as primary beneficiary, disclaims the inheritance. It will now pass to the next in line as named by the deceased (the contingent beneficiary). The IRA will pass to the child and accomplish exactly what was desired but could not have been planned years before. The disclaimer is a beautiful thing when estate tax issues are concerned.

Note the following:

  • The disclaimer must be made before the property is accepted. The beneficiary cannot have already placed his or her name on the account or changed investments.
  • The disclaimer is required within 9 months of date of death.
  • The potential to use the disclaimer must be well thought out in advance, when the IRA distribution is being planned, because it’s easy to have a disclaimer that will not be qualified. A qualified disclaimer must pass to someone other than the disclaimant and without direction by the disclaimant.

For example, if the property is disclaimed in favor of a trust to which the disclaimant is the beneficiary, the property in effect goes back to the disclaimant and that won’t be a qualified disclaimer. There is an exception when the disclaimant is the spouse. Or, if the property is being disclaimed in favor of a trust for which the disclaimant is trustee, the trustee can direct disposition of the assets and again, the disclaimer will fail to be qualified.

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