Using Disclaimers to Achieve Client Goals: Double Disclaimers – Part 2

It’s difficult to even think that someone might not want to accept inherited assets. But sometimes clients don’t need any more assets and a newfound inheritance simply may compound their estate tax issues. This is the second of two articles regarding disclaimers. The first article examined the basics of disclaimers. This second article examines a more complex “double disclaimer” and an example of that situation.

As examined in the first article, the requirements of a qualified disclaimer are set forth in Section 2518 of the IRC. It must be in writing, within 9 months, receiving no benefit, and passing either to the spouse or someone other than the disclaimant.

Sometimes a simple, one-step disclaimer will help you achieve the client’s goals. The first article examined such an example. However, sometimes the situation is more complex and a double disclaimer might be necessary to achieve the client’s goals.

Let’s look at an example:

Bill had a trust leaving everything to his surviving spouse, Mary. However, if Mary disclaimed, the property would be held in trust for the benefit of Mary and Bill’s children, Sally and Jason. At Mary’s death, the trust provides the property would go outright to Sally and Jason. If Sally or Jason predeceases Mary, the property would go to their descendants, if any, or to Bill’s descendants.

Mary decides she doesn’t want Blackacre and wants it to go to her children immediately without using any of her estate/gift tax exclusion. The first step in this process is for Mary to execute a qualified disclaimer of the property. That’s the first disclaimer that sends Blackacre to the Bypass or Family Trust for her benefit and the benefit of Sally and Jason. (Remember, even though Mary would benefit from the Bypass Trust, this meets the requirements of a qualified disclaimer because she is the decedent’s spouse.) Next, Mary would execute another qualified disclaimer, this time of her interest in the Bypass Trust. Mary is now treated as having predeceased and the property would go to Sally and Jason. In fact, if desired, the family could go one step further. Let’s say Mary only wanted Sally to get Blackacre and Jason agreed to that plan. After Mary did the first disclaimer sending Blackacre to the Bypass Trust and the second disclaimer of her interest in the Bypass Trust, Jason could disclaim his interest. Since Jason has no children, the terms of the trust would send the assets to Sally. Remember, like releasing water from the dam, it’s imperative to chart the course of the river to know where it will go.

Of course, if Mary wants to get the property just to Sally, she’d have to rely on the expectation that Jason will disclaim after Mary does. Jason would be under no legal obligation to do so.

Disclaimers can be a great way to achieve client goals. Sometimes they can be quite tricky and require thought to achieve the desired outcome. Sometimes more than one disclaimer might be necessary to achieve client goals. Remember to chart the course of the river before releasing the water from the dam and follow the rules of Section 2518 for a qualified disclaimer.

Stephen C. Hartnett, J.D., LL.M.