Disclaimers In Post-Mortem Estate Planning

Disclaimers In Postmortem Estate Planning

Disclaimers can be an effective tool to effectively have the property pass in a fashion other than might be set forth in a decedent’s will or trust. When a person disclaims an interest in property, that person is treated as if he predeceased the decedent and the property will pass to the next named beneficiary. For example, a parent provides in his will that his entire estate is to pass to his only son, otherwise to his son’s children.

At the time of the parent’s death, the son determines that his own assets are sufficient and that he would prefer that the property he is about to receive from his parent pass instead to his own children. If the son were to accept the property and then give it to his children, to the extent the value of the property given was in excess of the annual gift tax exclusion for each child, the son would be making a taxable gift (thereby “using up” part or all of his $11,580,000 lifetime gift tax exclusion amount).

Instead of receiving the property and then gifting it to his children, the son could disclaim his interest in his parent’s will. The property would then pass to the son’s children directly and would not be considered a gift by the son.

Creating A Disclaimer

The basic requirements of a disclaimer are as follows. First, virtually every type of property interest, i.e., any legal or equitable interest or estate (present, future or contingent) in any real or personal property may be disclaimed. Fractional interests can also be disclaimed. The interest being disclaimed can be as the result of inheritance, bequest, gift, as beneficiary of an insurance policy, as surviving joint tenant, etc.

To be effective, a disclaimer must be made in a timely fashion. Generally, this is 9 months after the beneficiary is ascertained and the interest being disclaimed is indefeasibly vested in such person. (For Federal purposes, if the property interest vested in a person prior to reaching age 21, the person has 9 months from the day he attains age 21 to make an effective disclaimer.)

With respect to joint property, a surviving joint tenant generally has 9 months from the death of the other tenant to disclaim. The disclaimer cannot be made with respect to any portion of the jointly held property for which the disclaimant furnished the consideration, i.e., the surviving joint owner can only disclaim the deceased owner’s share of the jointly held property.

The general rule is that the disclaimant must not have accepted the interest being disclaimed nor any of its benefits. This rule can sometimes pose a problem with respect to disclaimers of joint property. With respect to real estate, acceptance will not be based merely on the fact that title to the property vests immediately in the disclaimant upon the death of the decedent under state law; neither does the payment of property taxes necessarily constitute acceptance of the benefits. If the property is residential property, merely residing in the property prior to the disclaimer will not disqualify a joint property owner from making an effective disclaimer.

To be effective, the disclaimed interest must also pass without any direction on the part of the disclaimant. For example, if A is left a property interest which would otherwise pass one third to B, one third to C and one third to D, A cannot disclaim the one third interest which is to pass to B. (If A disclaims a one third interest, that one-third disclaimed interest would, in fact, pass equally to B, C, and D.)

If the disclaimant will receive the property as an heir or a residuary legatee under a will or trust, he must disclaim that interest as well. For example, A decides to disclaim her one-half interest as surviving joint owner is B’s real estate. A is also the beneficiary under B’s will and trust. A must not only disclaim the joint property interest, but must also disclaim any beneficial interest under B’s will and/or trust.

The disclaimant must not retain the right to direct the beneficial enjoyment of the disclaimed interest. For example, assume a husband creates a trust for his wife’s benefit which provides that the wife will receive income and principal for life either at the trustee’s discretion and/or subject to an ascertainable power, and the wife is also given a limited power of appointment over the property upon her death. The wife cannot disclaim her right to receive the income and principal for life but still retain the limited power of appointment.

There can be potential “generation-skipping” transfer tax problems with a disclaimer. If a bequest passes to a “skip person”, the transfer may be subject to the GST tax (subject, however, to the availability of the decedent’s $11,580,000 GST exemption, the exemption available as of 2020). Note here that even though the legal effect of the disclaimer is to treat the disclaimant as having effectively predeceased the person creating the transfer, for GST purposes this rule is ignored. For example, suppose that A dies leaving everything to his son, B, otherwise to B’s daughter, C. If B predeceases A when the property passes directly to C, it is not subject to the GST tax because C is not considered a “skip person” in that context. (C “steps up” a generation in this case.)  If, however, B survives A but disclaims his interest, even though he is otherwise considered as having predeceased A for purposes of the disclaimer, when the property now passes to C it will be considered as passing to a “skip person” and subject to the GST tax.

Note also that there can be differences between federal and state law as to the effectiveness of disclaimers. It is imperative to be sure that, before making any proposed disclaimer, it will be effective for both federal and state law in accordance with the disclaimant’s intentions. Keep in mind that a disclaimer is an irrevocable action which, once taken, cannot be undone!

It is possible to disclaim a fractional part or share of any property interest, or any interest in any specific asset. It is not possible, however, to disclaim a lesser interest in property. For example, if A leaves his real estate to B outright, B cannot disclaim the fee simple interest in the real estate while still retaining a life estate in the property. With respect to assets in trust, one cannot disclaim specific assets in a trust while still accepting the income derived therefrom. One can disclaim an undivided portion of an interest in a trust, or a specific pecuniary amount.

The disclaimer must be in writing and signed by the disclaimant or his conservator, guardian, or Personal Representative. The disclaimer must be clear and unequivocal, i.e., there can be no conditions attached to the disclaimer. The disclaimer must be received by the transferor of the interest, or his legal representative, or the holder of the legal title to the property being disclaimed, within the 9 month time frame discussed above.

If the transferor is a decedent, it is best not only if the disclaimer is delivered to the Personal Representative of the decedent’s estate within 9 months, but also filed and docketed in the applicable probate court within 9 months. If the disclaimer affects real property and is going to be recorded in the applicable Registry of Deeds, it must also be acknowledged in the same fashion as deeds (i.e., notarized) and recorded in the Registry of Deeds. (Again, it is best to actually record the document within 9 months as well.)

Disclaimers In Massachusetts

Under Massachusetts law, fiduciaries, including guardians, conservators, and Personal Representatives, may disclaim property on behalf of a deceased beneficiary or a beneficiary under legal disability. The probate court which appointed the fiduciary must approve the disclaimer as being “in the best interests” of those interested in the estate of the beneficiary or the estate of such beneficiary and not detrimental to the best interests of the beneficiary or the estate of such beneficiary.

Additionally, the court must decree that the fiduciary is authorized to execute and file the disclaimer. Disclaimers by fiduciaries can be particularly useful where a decedent and his beneficiary die within a short period of one and other. For example, A dies leaving property to his son, B, otherwise to B’s daughter, C. Three months after A dies, B dies as well. If nothing is done, the property left to B by A becomes part of B’s taxable estate and when it passes to C, could be taxed again. Assuming A and B are both in a Federal taxable estate, that property will be taxed twice (with a possible credit for taxes on prior transfers).

The better choice would be for the Personal Representative of B’s estate to disclaim his interest under A’s will or trust such that the property passes from A to C directly. (Note, again, that the transfer from A to C may be subject to the GST tax.) If a disclaimer is to be made by a fiduciary, it should be noted that it make take some time to obtain the necessary court decree. The court will require the appointment of a “guardian ad litem” to review the proposed disclaimer and this will invariably delay the process. Thus, it is best not to wait until the 9 months has almost elapsed before petitioning the court for the appropriate authority to make the disclaimer.

The forgoing discussion is not intended to be an exhaustive discourse on all the issues that must be reviewed and addressed in considering the possibility of disclaiming an interest, but it only intended to highlight some of the issues that need to be examined. Fedele and Murray, P.C., can assist you in addressing these issues as well as any others that might be encountered.

Our Firm Can Help

Since disclaimers can be affected by both state and federal law, it is imperative to obtain legal counsel that understands how to navigate the relationship between the two. With more than 35 years of experience in Massachusetts law, Fedele and Murray, P.C., has the answers you need. Contact us by phone at 781-551-5900 or by filling out our contact form online.