In my most recent blog article, I covered some of the legal basics of “disclaimer trust” planning. If you have not read it yet, click here.
Today, I want to talk more about reasons why you might want to disclaim property, as well as the concept of partial disclaimers or partial renunciations (as they are known here in the state of New York).
Reasons to Disclaim or Renounce
There may be many reasons for disclaiming property that you are otherwise due to receive from a trust or from a last will and testament. Here are three common examples:
1. Passing Benefits to Future Generations
Disclaimer trust planning can be used to pass all assets to the surviving spouse (outright or in a trust), but while reserving an option for the surviving spouse to disclaim all or a portion of the decedent’s share into a bypass trust (also known as a “B” trust or a Family Trust). A bypass trust is a common “wait and see” approach used by married couples. It can guarantee that their children will eventually receive the property by making them the ultimate beneficiaries.
2. Creditor Protection
A bypass trust is often drafted so that the surviving spouse manages it as a trustee, and the spouse having access to income and principal. It can therefore provide a safety net for the surviving spouse, if the surviving spouse needs more fund. At the same time, it can also provide creditor protection because the surviving spouse does not technically “own” the disclaimed assets. However, to provide creditor protection (and to prevent the property’s inclusion within the surviving spouse’s estate), the surviving spouse’s access to the principal must be limited to ascertainable standards. These include the 5×5 powers or health, education, maintenance, and support (the HEMS standard). There are other methods for creditor protection that you would want to discuss with an experienced attorney.
3. Capital Gains Planning
Assets which are likely to appreciate may be the best selection for those to be disclaimed into the bypass trust for capital gains planning. If the survivor’s estate might be taxable, care should be taken not to increase it by adding appreciating assets or requiring income distributions (as per a marital trust). Yet, as indicated, a “wait and see” (at least until the first death) solution is possible with this type of disclaimer trust planning.
Making a Partial Disclaimer or Renunciation
Given the language of the statutory law, regulations, and examples given, it is a clear a person may disclaim in whole or in parts any interest or power over property. This makes a partial disclaimer possible. Under IRC § 2518(d), such a “partial disclaimer” may be expressed as a fraction, percentage, monetary amount, term of years, a limited power, or another interest or estate in the property.
This option opens up a wide variety of opportunities to disclaim partial interest in property, shares of stock and other valuable assets for the reasons listed above. The beneficiary can utilize disclaimer trust planning in whichever ways might benefit them and bypass beneficiaries the most.
In our next article, I will outline the different types of partial disclaimers. Please check back or sign up for my monthly newsletter for the latest updates and article links.
How Are Joint Accounts Handled?
It is important to know that the U.S. Treasury and the state of New York do provide special rules for joint bank, brokerage, and other investment accounts established between spouses or between other non-spouse partners. I will not go through all the specific details here, but it is very important to understand both Federal and state laws and tax codes before disclaiming or renouncing any assets, especially jointly-held property and accounts.
With the proper disclaimer trust planning and legal strategy, beneficiaries, and trustees have numerous options to consider. If it is possible and to your benefit (or to the ultimate benefit of future beneficiaries) to disclaim or renounce inherited assets, you should consider doing so. Just make sure you are planning properly and preparing the legal documentation in a way that are correct and which protect you and your assets (so that they can be safely passed onto the next beneficiary in line when the time comes).
To learn more about disclaimer trust planning or the filing a partial disclaimer or renunciation in New York, contact me today. Let me help you make the right legal estate planning decisions for you and your family’s future.
