Disclaimer trust planning is a “wait and see” approach for estate tax planning and use of the exemption amount. It is, essentially, a refusal to accept an interest in a property to be transferred by bequest under a last will and testament or from a trust (inter vivos or testamentary).
Reasons for Rejecting Property
The question is why would anyone ever reject an interest in property to be transferred to him or her? The disclaimed property may be unwanted by the disclaimant (that is, the person making the disclaimer) for a number of different reasons. Examples include:
- Creditor Issues—The disclaimant may have creditor issues and will decline the property as a way to preserve it for other beneficiaries. There is nothing for creditors to take if the disclaimant never received the property.
- Tax Issues—The property may put the disclaimant over the estate tax exemption threshold, which could result in an estate tax liability upon his or her subsequent deaths. The disclaimed property will not be a part of his or her future taxable estate.
- Benefitting Other Beneficiaries—The disclaimant may disclaim the interest, thus shifting the value elsewhere (often to a younger generation).
Where Do the Assets Go After Disclaiming?
It is important to understand the disclaimant does not and cannot have control over where the assets go after they are declined. Instead, this is determined by the document that bestowed the assets upon him or her in the first place—typically either a last will and testament or a trust (inter vivos or testamentary).
Regardless of the reason for disclaiming property, the disclaimant must take the proper steps to ensure the disclaimer constitutes a qualified disclaimer. Otherwise, the purpose for disclaiming may go unrealized and an unintended taxable gift might result.
Renunciation in New York State
In New York, a disclaimer is called a “renunciation.” However, the principal is the same.
It is also important to understand the Federal tax implications of a disclaimer or renunciation. Internal Revenue Code (“IRC”) § 2518(a) provides that, if a person makes a qualified disclaimer with respect to any interest in property, the disclaimed interest will be treated for Federal, estate, gift (and generation-skipping) tax purposes as if it had never been transferred to the disclaimant. The property is treated as passing directly from the transferor to the person entitled to received is as a result of the disclaimer. Therefore, the disclaimant is not treated as making a gift.
Federal and State Disclaimer/Renunciation Requirements
Pursuant to Federal and New York state laws, here are the criteria that a qualified disclaimer must meet:
- It must be a writing that identifies the property, and is signed by the “disclaimant”; and
- It must be an irrevocable and unqualified refusal; and
- It must be delivered to the appropriate recipient (i.e., the transferor, the representative of the transferor’s estate, the holder of legal title to the property, or the person in possession of said property); and
- It must be delivered within nine (9) months from the date on which the interest is created, or nine (9) months from the disclaimant’s turning age twenty-one (21) years old; and
- There must be no acceptance by the disclaimant (that is, the disclaimer it must not have accepted the interest or any benefits from the disclaimed property); and
- As a result of the disclaimer, the property must pass to another person (or the spouse of the transferor) without direction by the disclaimant—that is, the property disclaimed must pass without any direction from the disclaimant; and
- To be valid for federal tax purposes, the disclaimer must comply with applicable state law.
In addition, an effective renunciation under New York state law, must satisfy the following specific requirements of Section 2-1.00 of the New York Estates, Powers and Trusts Law:
- There must be a writing that is signed and acknowledged by the “renouncing party”; and
- The writing must constitute an irrevocable and unqualified refusal; and
- The writing must be filed with the Surrogate’s Court, with notice served personally on the fiduciary holding the property and notice served by mail on persons whose interests are accelerated; and
- That filing must happen within nine (9) months from the “effective date of disposition”;* and
- There must be no acceptance by the renouncing party; and
- An “affidavit of no consideration” must be filed with the Surrogate’s Court; and
- Prior to the repeal of the gift tax in New York, to be valid for New York estate purposes, the disclaimer had to be valid for federal tax purposes.
*For a future interest, the date of disposition is the date the interest becomes an “estate in possession.” This is generally the date of death.
In our next blog article, we will dive deeper into reasons why you might renounce, the process of making partial disclaimers and the key benefits of disclaimer trust planning.
If you need estate planning guidance or advice concerning the filing of a renunciation in New York, contact me today to schedule a a legal consultation.
