The loss of a beloved spouse is a terrible ordeal. The grieving process can be long and painful. Unfortunately, such a loss may also kick off important legal matters that require your attention. Here are a few things you may need to consider to protect your future and safeguard your spouse’s legacy.
If your spouse’s will or trust, or your joint trust, has a disclaimer provision, one of the time-sensitive decisions you will need to make is whether to disclaim (refuse to accept) money or property that you will otherwise receive as a trust beneficiary. State and federal law set forth the requirements that you must meet in order for the disclaimer to work as intended. Under Internal Revenue Code (I.R.C.) § 2518, a qualified disclaimer is simply an irrevocable, unqualified refusal to accept a gift or bequest of a property interest. The disclaimer allows the interest in property to pass to someone other than the beneficiary who originally would have received it, and it is not considered a taxable gift from the first beneficiary to the next beneficiary in line. There is a special exemption under I.R.C. § 2518(b)(4) that allows a surviving spouse to benefit from disclaimed money or property, but taking advantage of the exemption requires careful planning.
A qualified disclaimer must meet the following requirements:
- It must be made in writing as required by state law.
- It must be made within nine months after your spouse’s date of death.
- You must not accept the property interest or its benefits.
- The interest must pass to someone other than you without any direction by you (the person who is disclaiming the interest).
Making the right decisions in the timeframe you have is vital. Here’s a quick guide to help you make the most of the property disclaimer provision:
Step 1: Locate the estate planning documents.
Your estate planning documents are one of the first sources of direction about what should happen next. Your spouse’s documents contain the roadmap that indicate what your spouse wanted to happen to their property and money, and they were likely designed in coordination with your own estate plan. A will or trust may include a provision specifying how particular property should be handled if the original beneficiary disclaims their interest in it. Your estate planning attorney will need to have those documents to advise you about the best course of action.
Step 2: Speak to an experienced California estate planning lawyer.
A mistake at this point can have serious consequences. Without the right guidance, you may fail to maximize the available assets. A knowledgeable estate planning attorney can be of tremendous help. Because of the limited time during which you must elect to disclaim accounts and property, you will need to make an appointment with your attorney as soon as you can. Your attorney will review your spouse’s estate plan with you and help you determine if it contains disclaimer provisions, and if so, whether you should consider disclaiming your interest in a will or trust and the effect of such a disclaimer.
Because of the unlimited marital deduction under federal tax law for US citizens, your spouse was permitted to transfer an unrestricted amount of accounts and property to you at any time during their life or at their death, free of taxes. However, the transferred amounts will usually be included in your estate. If you and your spouse had a large amount of wealth, using a disclaimer is one strategy for taking advantage of the lifetime estate tax exemption.
Currently, the exemption amount is historically high. In 2023, the federal estate tax exclusion amount is $12.92 million for an individual and $25.84 million for a married couple, and only estates that exceed this amount are subject to estate tax. However, the current estate tax exclusion amount is scheduled to be reduced by half at the end of 2025, so many more estates will soon be subject to estate taxes unless the law is changed. In addition, some states have their own estate or inheritance taxes applicable to estates of a much lower value. If your estate is likely to be subject to federal or state estate taxes, disclaiming an inheritance may make sense, especially if the beneficiary specified in the trust document as the next in line is less likely to be subject to estate taxes, or if the trust specifies that the disclaimed property can be transferred to another trust that will benefit you without being included in your estate.
Keep in mind, however, that for federal estate and gift taxes purposes, after your spouse’s death, you must file an estate tax return and make a portability election that will allow your deceased spouse’s unused exclusion amount (known as the deceased spousal unused exclusion (DSUE) amount) to be applied to your subsequent transfers during life or at death. For example, if your spouse’s gross estate is valued at $5 million and does not qualify for the unlimited marital deduction, you can elect to have their unused estate tax exemption of $7.92 million transferred to you. As a result, your estate would have a total exemption of $20.84 million ($12.92 million plus $7.92 million) in 2023, so a disclaimer may not be necessary unless you and your spouse have very large estates.
We can discuss your situation and explain your options clearly. Together, we can find the best path forward to secure your future. When you decide whether to disclaim assets or claim them, you will do so with a full understanding of how it will impact you. Everything from estate tax liability to your estate planning goals for the future will be considered to find the solution that’s right for you.
Step 3: Consult the experts necessary to make the right decision.
Your estate planning attorney isn’t the only professional you may need to consult. Advice from tax experts, accountants, financial professionals, and others can help you consider every angle. The benefits of a disclaimer provision rest heavily on an understanding of what you stand to inherit, as well as what you want to pass on to your beneficiaries in order to determine if a portability election will provide adequate protection or if disclaiming some of the accounts and property in your spouse’s estate or held in trust for your benefit is the better strategy. They will help you consider all the important variables, including the impact of a disclaimer on your family members: Will they have to pay estate tax at your death if you do not disclaim your interest in the trust? Or will the beneficiary who receives the inheritance after a disclaimer be negatively impacted, for example, by increased income taxes if they receive trust income that pushes them into a higher tax bracket?
Contact an Estate Planning Attorney Today
The decision to disclaim an interest in property or other assets can feel odd, but it may be a great way for you to achieve your estate planning and tax-savings goals. We can help you evaluate your unique circumstances to determine whether a disclaimer will benefit you and your loved ones, as well as assist you in meeting any looming deadlines and avoiding possible pitfalls. Give us a call today to set up a meeting.
