Disclaiming an Inheritance

A person may want to disclaim an inheritance or gift in order to maximize gift and estate tax exclusions, or simply because he or she does not want the property and/or the resulting tax burden. A disclaimer is a refusal to accept an interest in the power over property, including a power of appointment. Fla. Stat. § 739.102. A person can disclaim property or an interest in property in whole or in part, and may make the disclaimer conditional or unconditional. Through the use of a disclaimer, beneficiaries may take a retrospective look at the decedent’s estate plan, and determine whether, based on current circumstances, there is a more advisable way to distribute assets.

There are several instances in which a person may wish to make use of a disclaimer. One instance is to take advantage of the gift and estate tax exemption. It may be optimal for a surviving spouse to disclaim a portion of the deceased spouse’s estate if the decedent has not used his or her lifetime gift tax exemption. By doing so, the amount disclaimed passes to the next generation free of tax. Disclaimers can also be used to optimize the generation-skipping tax exemption.

A disclaimer may also be used by a beneficiary with a creditor problem. In Florida, individuals who disclaim property or an interest in property are deemed to have died before their interest in the property was created. Fla. Stat. § 739.201. Therefore, the property never belongs to the beneficiary, and the beneficiary’s creditors have no rights to the property. However, this has been limited by the courts and by statutory limitations to making a disclaimer. For example, the disclaimer is barred in Florida if the person making the disclaimer is insolvent when the disclaimer becomes irrevocable. Fla. Stat. § 739.402.

Disclaimers are governed by both federal and state law. Florida has enacted the Uniform Disclaimer of Property Interests Act. The provisions of the Act must be strictly followed in order to affect a valid disclaimer. The Act states that for a disclaimer to be effective it must: (1) be in writing; (2) declare that it is a disclaimer; (3) be signed by the person making the disclaimer; and (4) be witnessed and acknowledged in the manner provided for deeds of real estate to be recorded in this state. Fla. Stat. § 739.104(3). When a valid disclaimer is made, the interest that was disclaimed will be passed either according to an instrument (such as a will or a trust), or by state law. The person making the disclaimer cannot direct how the interest in property passes. The person making the disclaimer also may not have accepted the interest or any of its benefits before making the disclaimer.

Disclaimers are regulated by both federal and state law, and state laws may differ. The Internal Revenue Code requires disclaimers to be made within 9 months after the date of the transfer creating the interest. Many states shorten this timeline. Also, disclaimers could have tax consequences for the person who receives the property or interest in property in lieu of the disclaimant. For these reasons, it is important to consult an experienced attorney in your jurisdiction before determining whether making a disclaimer is in your or your family’s best interests.

If you or someone you know needs assistance dealing with the complexities of estate planning or administration, please do not hesitate to contact the legal team at Chepenik Trushin, LLP.