Imagine someone gifts you property or leaves you property in his or her will. If you don’t want the gift, you can refuse it. But, if you refuse the property improperly, you may get caught in a tax trap.

Just as you can’t be forced to buy something you don’t want, you can’t be forced to inherit or receive a gift you don’t wish to own. How do you refuse to accept property so that your refusal avoids tax problems and is effective for federal estate or gift tax purposes? By exe­cuting a qualified disclaimer.

How a Qualified Disclaimer Works

When you disclaim property, you’re treated as if you never owned the property. This is important because when you give property to another person, the gift can create a gift tax liability.

For example, if you don’t accept certain prop­erty and ask that instead the property be given to your children, you can be considered to have made an indirect gift to your children, especially if you know your request will result in the transfer to your children.

If you make a qualified disclaimer, the prop­erty passes to your children without any direction from you. Because you can’t direct who receives the property in the event you disclaim it, make sure you know what will happen to the property before you disclaim. Determine how the property will pass after the disclaimer by reviewing the terms of the will, trust, deed, contract or the laws of intestacy, which-ever applies.

If the disclaimer isn’t a qualified disclaimer for federal estate or gift tax purposes, even if the disclaimer is valid under state law, you will have made a taxable gift to the eventual recipi­ents of the property.

For example, Aunt Anne gives you a parcel of real estate, and you decide you would rather your kids own the property. If you have Aunt Anne title the property in the names of your children, two potential taxable gifts have been made, Aunt Anne’s and yours. But, Aunt Anne can give you the real estate on the condition that if you don’t accept it, then it will go to your kids, and you sign a qualified disclaimer, there is only Aunt Anne’s gift and no second gift from you to your children.

Why Disclaim a Gift?

There are numerous reasons why you may want to make a qualified disclaimer:

Decline undesirable property. You may want to avoid receiving undesirable property, such as real estate with environmental problems.

Avoid creditors. You may want to avoid creditors attaching your property in the event you file bankruptcy or lose a lawsuit.

Benefit family members. You may want to benefit other family members. For example, if you and your sister are given joint ownership in a car by your father, but you don’t need the car, you may be able to title the car in her name without any adverse tax consequences by signing a quali­fied disclaimer.

Save taxes. You may be able to save taxes. Property can be transferred directly to a family member without being part of your taxable estate. For example, imagine you’re a single parent who has acquired suffi­cient wealth to live comfortably, and you learn you have inherited $100,000 from your wid­owed father. If you accept the bequest, the money will be taxed again on your death. Your father’s will instructs that the money be distributed to your children only if you prede­cease him. Also, the bequest falls under your father’s $1 million exemption from the generation-skipping transfer tax. If you disclaim the inheritance your children your children will receive it without paying the federal estate tax on the money which would other­wise be due on your death.

Making a Qualified Disclaimer

The basic requirements for a qualified dis­claimer for federal gift tax purposes are:

• The disclaimer must be in writing;
• The disclaimer must be received by the transferor within nine months of the trans­fer or of the date the recipient reaches age 21;
• The recipient must not have already accepted any benefits of the disclaimed property; and
• Unless the recipient is the spouse of the transferor, the property must pass so that it does not benefit the person making the disclaimer.

What To Do If Disclaiming Is Not an Option

Sometimes it’s not possible to disclaim and have the property pass as desired. For exam­ple, state intestacy laws or the default terms in a will or trust may frustrate your objectives, or you may need a minor or other incapacitated person to disclaim, and laws do not easily permit such a disclaimer. Your only option may be to accept the gift or bequest and then make gifts to your children or parent. This may result in your making taxable gifts or using all or part of your lifetime transfer tax exemption amounts.

Avoid this by planning for the possibility of a disclaimer when establishing your estate plan. For example, you may want to leave some amount of money to your brother, say $20,000, but you are unsure what his needs will be, and the amount is not large enough to bother with a trust. Accordingly, you can bequeath the money to your brother and pro­vide that if he disclaims the gift or is deceased, the funds will pass to your children or spouse. If your brother doesn’t need the funds, he can disclaim without making a taxable gift to your children.

Points To Remember

Disclaimers can be effective but require care in implementing. So, when there is a lifetime transfer or death in the family, remember these three points:

• Consult your estate planning advisor before doing anything with the assets. Any use of the asset may mean that it can’t be disclaimed.
• There is a time limit to making a qualified disclaimer. Adults generally have nine months from the date of death or transfer to disclaim.
• Even though a death may result in a future interest in a trust becoming a present inter­est, it may still be too late to make a quali­fied disclaimer of the beneficial interest in the trust.