Sunday, September 8, 2013

You Gave Up What?!? – The Disclaimer

You Gave Up What?!? – The Disclaimer

When someone passes, let’s be honest, we mourn the loss, and then get in line with our hands out, to get what’s coming to us.  While an Estate Plan can be created with certain right and benefits in mind, facts change, needs change and taxes change, such that it might be prudent to give up the gifts from a Will.  This is done through a “Disclaimer”.  In this day and age of a weird economy, this may sound silly, but there can be really good reasons.  I plan on having a series of blogs just on tax and Estate Planning very soon from a contributing CPA. We are going to talk some tax issues here, so just roll with me.  That said, let’s start with some mechanics of the process.

A Disclaimer is any document the declines, refuses, denounces or disclaims any interest that would otherwise be taken by a beneficiary.  PC §265.  These rights, procedures and formalities are all outlined in the Probate Code, but we will not walk through the technicalities here.  Suffice it to be said that there are strict formalities that must be followed as to writing and timing of the Disclaimer.  It should be noted that the Disclaimer must be done before the beneficiary receives any benefit from the gift to be disclaimed and may not direct the advancement or other recipient of the gift.  Once done, a Disclaimer is finally binding on party passing up the gift.

Unless the creator of the gift provides for a specific disposition in the event of a Disclaimer, the interest Disclaimed shall descend or be distributed as if the Disclaimant predeceased.  PC §282.  As you may no doubt be thinking, how does this affect who gets what under the inheritance and representation discussion a few weeks ago in the “Come ‘n’ Get It” blog.  Again, with a variety of complexities, the Probate Code address these permutations in various code sections, so please consult with an attorney before acting on any Disclaimer.

Back to the main question, why would anyone pass up a gift under a Will?  Actually, there can be several good reasons, but the primary reason may be taxes.  Every year, the Federal Estate Tax level changes, and the pertinent Exclusion can be significant.  Congress couldn’t even get its act together in 2010, when the Estate Tax was 0.  Other years, the Exclusion has been $10,000,000, meaning that there are no taxes on the first $10,000,000!  I believe the current Exclusion is $5,000,000 but again consult with your CPA, and be aware of the variability of rates when you create your Estate Plan.

How would this work?  An example, taken from the LexisNexis treatise, California Wills and Trusts, would be as follows:

Husband has an Estate of $3,000,000.  Wife has nothing.  Husband’s will leaves all of his Estate to Wife, but provides that any interest Wife may disclaim will be distributed to the trustee of a “Disclaimer Trust”.  Wife will have the lifetime income interest in the trust.  Husband and Wife’s children are the remainder beneficiaries.  Husband dies in 2004 when the applicable Exclusion was $1,500,000.  Wife was the surviving spouse.  What should Wife do?

Normally, all of the $3,000,000 Estate could pass to Wife free of Estate Tax since all of the Estate could qualify for the Marital Deduction.  However, on Wife’s death, all of her Estate would be subject to Estate Taxation.  Assuming Wife dies in 2005, and the Estate of $3,000,000 is still intact, in 2005 the applicable Exclusion amount was $1,500,000.   The Estate Tax was about 46%.  Therefore, $1,500,000 of the $3,000,000 Estate is excluded, leaving $1,500,000 subject to tax at 46%, creating a tax bill of about $695,000!

However, by using the Disclaimer, Wife could make her Widow’s election to take her $1,500,000 and leave $1,500,000 in the Estate.  Then Wife could Disclaim the remaining $1,500,000 at Husband’s death, which would pass into the Disclaimer Trust, which would pass free of taxes upon Wife’s death.  Wife has the benefit of income from the Trust during her life and the family is saved from paying about $695,000 in Estate Taxes.

This one example of how a Disclaimer may save money in the overall Estate Plan.  I touched on several different tax and planning concerns, Estate Taxes (Federal & State), Tax Exclusions, Marital Deductions as well as Elections and Disclaimers.  These are all separate technical concepts.  We have talked about Elections and Disclaimers.  We have not talked about Estate Taxes (Federal & State), Tax Exclusions, Marital Deductions. These will be discussed in special blogs in the near future.  Please be aware that each of these concerns and concepts will have different impact on each and every estate.  Also, for smaller estates, they may be of no concern, which is why not everyone needs a complex Estate Plan.  However, there are countless reasons to consult with an Estate Planning attorney to determine which of the many Estate Planning tools can be used by you, your family and friends in order to retain as much wealth as possible while sustaining your own financial health.

I hope you will review your Estate Plan with you're “A” Team, or at least begin to seek out an Estate Planning Attorney to start this process.  Stay tuned for future blogs.  However, if you have any questions, feel free to respond below, or if you are interested in learning more about an Estate Plan, Wills, Trusts, Advanced Healthcare Directives, or Divorce, Custody, Visitation, Child Support, Spousal Support, Property Division, Modifications, Remarriage, or Pre-Nuptial Agreements, please contact me at please contact me at, or through my other websites,, or for Fred Begun.