Uses of Disclaimers in Post-Mortem Planning

The idea of giving up an inheritance might sound foolish, but in certain circumstances it can be a beneficial estate planning tool. While we as estate planning attorneys try to prepare for every possible outcome at the time of a death, there is no way to predict the timing of a death, the laws at that time, nor the assets a decedent will actually hold at death. Especially in today’s environment where COVID-19 has shocked our economy, the tax laws could change at any time.

A disclaimer or a renunciation is a refusal to accept an interest in property.  No one can be forced to receive a gift or bequest; everyone has the right to either accept or refuse what is given.  In certain situations, disclaiming may be more beneficial than actually receiving the gift.  If the beneficiary of a decedent’s estate disclaims an asset passing to the beneficiary (the “disclaimant”) as a result of decedent’s death, the asset passes to the next-in-line beneficiary as if the disclaimant had predeceased the decedent.

Under federal law, a “qualified disclaimer” is an irrevocable and unqualified refusal by a person to accept an interest in property so long as the following requirements are met:

1. The disclaimer must be in writing;
2. The disclaimer must be made no later than 9 months after the date of the transfer creating the interest (or 9 months after the disclaimant turns 21);
3. The disclaimant must not have accepted the interest or any of its benefits; and
4. As a result of the disclaimer, the property interest passes without direction on the part of the disclaimant either to decedent’s spouse or to a person other than the disclaimant.[1]

Under New Jersey Law, a disclaimer must be in a writing signed and acknowledged by the person disclaiming, and must: (1) Describe the property, interest, power or discretion disclaimed; (2) If the property interest disclaimed is real property, identify the municipality and county in which the real property is situated; and (3) Declare the disclaimer and the extent thereof.[2]  Unlike federal law, there is no time requirement for filing a New Jersey disclaimer; the disclaimer need only be delivered, and if required filed, before the right to disclaim is barred by N.J.S.A. 3B:9-9.[3]

New Jersey law does not allow use of disclaimers to avoid existing creditors; in such cases, the right to disclaim is barred under our statutes.[4]  However, there are many situations in which disclaimers may be used to optimize tax results.  Here are a few examples:

Using both spouses’ available exemptions from estate tax.  Estate planning attorneys incorporate disclaimer planning in wills by providing an outright gift of assets to the spouse, followed by a disclaimer trust.  The surviving spouse would establish and fund the trust by disclaiming all or a portion of the outright gift.  The decision to create the trust would be based upon the tax laws and other factors at the time of the first death.  The federal law of portability of spousal exemptions provides a method for both spouses’ federal estate tax exemptions to be secured, but New Jersey law does not provide for portability.  Therefore if New Jersey’s estate tax is reinstated, the surviving spouse could capture the predeceased spouse’s New Jersey estate tax exemption by disclaiming a portion of the gift to him or her.  If a disclaimer trust is included in a will, the disclaimed assets may be held in a trust for the surviving spouse’s benefit.

Allowing for tax deferral though use of the unlimited marital deduction.  If at a decedent’s death estate tax would be incurred because of gifts to children or other non-spouse beneficiaries, disclaimers by the beneficiaries may allow assets to pass instead to the surviving spouse, thus qualifying the gifts for the unlimited marital deduction under federal and state law.  For this to work, the surviving spouse would have to be the taker in default (the person who inherits if the named beneficiary is deceased) under the will or intestacy laws of the state in question.

Avoiding the imposition of New Jersey inheritance tax.  If a decedent’s will gives all probate assets to Class A beneficiaries for purposes of the New Jersey inheritance tax (spouses and children are Class A beneficiaries), but the decedent also named a “POD” (pay on death) beneficiary on a bank or brokerage account who is not a Class A beneficiary (thus incurring an inheritance tax at death), the beneficiary could disclaim.  Assuming the account then passes as part of decedent’s estate under the will, the disclaimer will have the effect of avoiding New Jersey inheritance tax.  Because New Jersey does not impose a gift tax (and provided there is no federal gift tax exposure), the POD beneficiary could be made whole by a gift from the beneficiaries under the will.

Obtaining an estate tax charitable deduction for a non-qualifying charitable gift.  A will may include a gift to a charitable remainder trust, which establishes a life estate for an individual and a gift of the remainder interest to charity.  Sometimes the gift does not qualify for a charitable deduction because the trust fails to meet the highly technical requirements of such a trust.  If the life tenant has sufficient wealth and is willing to disclaim the life interest, the gift to charity would be accelerated and an estate tax deduction for the full value of the trust would be obtained.

Optimizing the generation-skipping transfer (“GST”) tax exemption.  If children have sufficient assets of their own, they could decide to disclaim assets passing to them from a parent’s estate, or their interests in a GST trust, in order to pass the assets on to their own children.  The “predeceased parent exception” would apply and the transfers to the grandchildren would not be considered generation-skipping, thus preserving more GST exemption for other transfers.

Disclaimers can be extremely useful in appropriate circumstances.  They are a flexible tool that should always be kept in mind in post-mortem planning situations.

[1]I.R.C. § 2518.

[2]N.J.S.A. 3B:9-3.

[3]N.J.S.A. 3B:9-4.2.

[4]See N.J.S.A. 3B:9-9(a)(6).