A disclaimer is an irrevocable and unqualified refusal to accept an interest in property. It has two sources: IRC §2518 & N.J.S. 3B:9-1 et. seq., both of which must be complied with, along with a substantial body of regulations and case law.
A valid disclaimer has four elements:
1. It must be in writing
2. It must be received by the property transferor (or his representative) not later than 9 months after the date of the transfer (or the date when the transferee attains age 21, if later)
3. The disclaimant must not have accepted the interest or any of its benefits. The following all are proscribed:
- Using or selling the property
- Accepting dividends, interest or rents
- Payment of taxes or mortgage obligations
- Directing others to use the property
- Accepting consideration for making the disclaimer
4. The disclaimed interest must pass without direction on the part of the disclaimant to the spouse of the decedent or a person other than the disclaimant. A spouse-disclaimant may not have any power to direct the beneficial enjoyment of the disclaimed property unless such power is limited by an “ascertainable standard.” [Treas. Reg. §25.2518-2(e)(2); and see “Bypass Trust Trap” below]
For Federal Estate, Gift & Generation Skipping Transfer Tax purposes, the disclaimant is treated as having predeceased the property transferor.
The following guidelines should be carefully reviewed and followed:
- The 9 month filing deadline runs from the date of death in the case of testamentary transfers and the date of a completed gift for inter vivos transfers. No extensions allowed!
- Irrevocable trusts: The deadline runs from the date the trust is created or becomes irrevocable, if later
- The Bypass Trust Trap: A spouse may not hold power to appoint property unless limited by an “ascertainable standard”
- A survivorship interest in tenancy by the entirety or joint tenancy with right of survivorship property to which the disclaimant succeeds must be disclaimed within 9 months after the death of the predeceased co-tenant
- A taxable gift later included in an estate must be disclaimed within 9 months from the date of the taxable transfer
- A partial interest in property may be disclaimed if severable
- A fiduciary may exercise fiduciary powers to preserve or maintain disclaimed property without running afoul of the regulations. For example, it is permissible to re-title assets in the name of a beneficiary
Practice Tips:
Be certain not to take any proprietary action toward the disclaimed property, including requesting that executor of an estate do so. [Treas. Reg. §25.2518-2(d)(4), Exs. (1)-(4)].
Before disclaiming, be certain to examine will, trust document and laws of intestacy, as appropriate, to determine who will receive the disclaimed property.
Be sure to disclaim all interests in and powers over disclaimed property (fiduciary powers, powers of appointment, etc.). This is a potentially disastrous trap for the unwary.
New Jersey’s Medicaid regulations treat a disclaimer of property as a transfer for Medicaid eligibility purposes, so be sure to familiarize yourself with the applicable regulation [18 N.J.A.C. §10:71-4.10]
Some common uses of disclaimers:
- Post-mortem estate planning
- “Correction” of faulty estate plan (e.g. where Marital Trust names non-spouse beneficiary)
- Shift assets from wealthier to less wealthy beneficiary
- Increase (or decrease) the Marital Deduction amount
- “Kill” a trust, as where the life income beneficiary disclaims his or her income interest, thereby accelerating the remainder interest, where the trust provides for its termination following the death of the life tenant