When You Might Want to Disclaim?

Published on: 23:57PM Mar 05, 2017

~~We got a little behind with our posting last week due to getting all of our farmers March 1 tax returns done.  I know over the last several years, I continue to prepare more and more farmer's returns and we have tried to get many of them to switch to filing on April 15 by making their January 15 estimate payment.  I think for next year I hope we can talk more of our farmers into using that option.  I know that we continue to get many Brokerage Form 1099s late in February and it gets tougher to get a properly prepared farmer's return done by March 1.

Now onto  the post.  When a person passes away, their last will usually has language indicating who the primary beneficiary of their estate is.  Additionally, a will indicates who gets the assets if that person has already passed away.  A disclaimer allows each person who is to receive assets from an estate to "disclaim" their interest partially or in full.  You might ask why would someone would want to not get a gift.

The classic example is a person who is part of a wealthy farm family and if they pass on their assets to the next generation, federal estate tax will be due very soon when their heirs pass away.

For example, assume Betty, age 99, has farmland worth $25 million when she passes.  Her will indicates that this  land will go to her two daughters age 76 and 78 who are both in poor health.  Each of the daughters already face a taxable estate, so adding $25 million onto their current estate means that at least another $10 million ($25 million times 40%) will be owed when each passes away.  However, if they each disclaim their interest (which will pass to their kids), the estate tax that may be owed on the farmland will be deferred easily for another 30 years or more.

A "qualified" disclaimer must be valid under both federal and state laws.  Usually this means that the disclaimant must properly document and perform the disclaimer within 9 months and they must not have gotten any beneficial use of the property.  The use of a disclaimer along with a credit shelter trust may be beneficial for a surviving spouse (this is more complicated than a blog post can handle).

If you are in a situation where a disclaimer might be beneficial, it is extremely important to discuss this with a qualified advisor.  Making a simple mistake can cost you a lot of money.