Ethan R. Okura
Hawai‘i Herald Columnist
A Disclaimer is a tool used in estate planning. It can be useful to reduce estate taxes or gift taxes. I will explain what it is and how it works in the event it might someday be helpful to you or your family.
What is a Disclaimer?
A Disclaimer is the refusal to accept property or money. Suppose someone dies and leaves you an inheritance. It could be by naming you in a will or a trust. It could be by having you as a joint tenant with rights of survivorship. It could even be that someone died without a will or a trust, but you have the right to inherit it because you are the closest living relative. Let’s say you don’t want to receive this inheritance. You sign a legal paper called a “Disclaimer.” Then the property or money doesn’t go to you. It goes to whoever would have inherited it if you were not living. That property or money does not become your property and thus does not increase the size of your estate. Since you never received it, you are not giving it away. Therefore, you do not have to file a gift tax return.
Examples of Implementation
Let’s look at some actual examples of how a Disclaimer can be useful. Suppose a husband and wife have close to, or over, $5.5 million in assets. Their wills say that everything goes to the spouse, and if the spouse is not living, everything goes to the children. They have some or all of their assets in joint names. They may have savings accounts and CDs in two names. They may own real estate as tenants by the entirety.
Let’s say Husband dies. All of the property and money in two names is supposed to go to Wife. If it does, Wife will have close to, or over, $5.5 million in assets. There is a danger that when she dies in the future there, might be an estate tax on her assets; she can use a Disclaimer. She goes to an estate planning attorney and signs a legal document that says she refuses to accept part, or all, of Husband’s half of the jointly held assets. Husband’s half of the assets go directly to the children. Wife still has her half of the assets, but she needn’t worry about having too much. There will not be an estate tax when she dies.
Nowadays, we can also file an estate tax return for Husband’s estate and use the new-ish feature of “portability” of his exemption to transfer the Deceased Spouse’s Unused Exemption (DSUE) to the surviving spouse — in this case, Wife — so that she will have more exemption from estate tax when she passes away, including her own exemption from estate tax, plus any unused exemption Husband had when he passed away.
Here is another example of how a Disclaimer can be used. Suppose your mother dies leaving you an inheritance. Her will or trust says that if you die before her, the inheritance will go to your children. You already have enough assets, and you don’t want to inherit more because it might cause you to have an estate tax problem when you die. You want it to go to your children instead, so you file a Disclaimer. The inheritance from your mother skips you and goes directly to your children, ensuring that you will not have an estate tax problem. You do not have to file any gift tax return.
Gift and Estate Tax Issue
To avoid gift and estate tax problems, a Disclaimer has to be a “qualified Disclaimer.” There are certain IRS rules as well as State of Hawai‘i rules that must be followed. A Disclaimer must be in writing and it must be delivered within nine months after you have the right to receive the property (for example, within nine months after the death of the person who is giving you the inheritance). There are detailed rules explaining to whom it must be delivered. You must not accept any benefit from the property, and the property must pass to someone else without you saying who it goes to.
However, keep in mind that even though there is no gift tax nor estate tax problem over the disclaimed assets when you use a Disclaimer, it could still create a Medicaid problem. The State of Hawai‘i takes the position that a Disclaimer is a transfer of assets. A Disclaimer could create a penalty period during which Medicaid will not help you with nursing home costs. However, it could be argued that under the law, a Disclaimer is not a transfer for any purpose, including Medicaid purposes. A hearings officer or the court would have to decide this issue.
A Disclaimer can be useful, but there are technical rules that must be followed. If you think you need to use a Disclaimer, be sure to consult with an estate planning specialist.
© OKURA & ASSOCIATES, 2021
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Ethan R. Okura received his JD from Columbia University in 2002. He specializes in Estate Planning to protect assets from nursing-home costs, probate, estate taxes and creditors.
This column is for general information only and is not tax or legal advice. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate-planning specialist.