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Gregory S. DuPont Aug. 29, 2023

Losing a loved one, especially a spouse, is one of the most difficult things you may face in life. Surely you'll need to take time to grieve, and there are also crucial steps to be taken to wrap up your spouse's estate.

If your spouse's will or trust had a disclaimer provision, there are some time-sensitive decisions that you'll need to make. One of them is to decide whether to disclaim (refuse to accept) money or property that you would otherwise receive as a beneficiary.

These three steps will help you determine if disclaiming is right for you:

1. Locate your spouse's estate planning documents

2. Meet with your estate planning attorney

3. Involve finance and tax professionals

Requirements for Disclaiming

State and federal law set forth requirements that you must meet for the disclaimer to work as intended. Under Internal Revenue Code (I.R.C.) § 2518, a qualified disclaimer is simply an irrevocable 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. Then, 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 from you (the person who is disclaiming the interest).

There are several steps you should take to ensure that you make timely decisions and properly disclaim a property interest if you choose to do so.

Step 1: Locate the estate planning documents.

Your spouse's estate planning documents are one of the first sources of direction about what should happen next. Their documents contain the roadmap of what they would have wanted. A will or trust may include a provision specifying how a particular property should be handled if the original beneficiary disclaims their interest in it. Your estate administration attorney will need to have those documents to advise you on the best course of action.

Step 2: Meet with your estate administration attorney.

Probate and estate administration can be complicated. So, it's important to seek help from a professional. You have a limited amount of time to disclaim accounts and property, so you'll need to schedule an appointment 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, 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. But, 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. For 2023, the federal estate tax exclusion amount is $12.92 million for an individual and $25.84 million for a married couple. Only estates that exceed this amount are subject to estate tax. But, the current estate tax exclusion amount is scheduled to be cut in half at the end of 2025. So, many more estates will soon be subject to estate taxes unless the law changes. Also, 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. This is especially true if the beneficiary specified in the trust document as the next in line is less likely to be subject to estate taxes. The trust may also specify that the disclaimed property can be transferred to another trust that will benefit you without being included in your estate.

Keep in mind that for federal estate and gift tax purposes, after your spouse’s death, you must file an estate tax return and make a portability election. This will allow your deceased spouse’s unused exclusion amount (DSUE to be applied to later 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.

An experienced tax attorney can help you determine the best strategy to minimize your estate taxes, or whether a disclaimer may be useful to achieve other goals. For example, you may want to provide funds to a beneficiary that is next in line.

Step 3: Include financial and tax professionals in the conversation.

In addition to your attorney, involve your financial advisor, accountant, and other financial or tax professionals in the conversation. This team of professionals will help you determine the value of the accounts and property you will inherit from your spouse, as well as the value of your own estate. This can help determine if a portability election will provide adequate protection, or if disclaiming some accounts and property 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 don't 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?

Meet with Our Estate and Tax Attorneys in Dublin, OH

Here at DuPont and Blumenstiel, we do it all. Our founder, Greg DuPont, is an educated estate and tax attorney as well as a Certified Financial Planner. He can help you determine how disclaiming your interest in a will or trust will affect you and the rest of your family. We will evaluate your unique circumstances and work with you to determine the right decision. Give us a call at 614-389-9711 to set up a meeting.