What is a Disclaimer?

A “disclaimer” is a formal refusal by a donee of property (by gift or by will) to accept the gratuitous transfer. Though seemingly an unusual event, disclaimers are actually quite common, for a variety of reasons. For example, a wealthy widow who has no need for the additional property willed by her deceased husband may prefer to disclaim the bequest so that it would pass to her children instead. When the intended recipient disclaims a gift or bequest, the subject property will eventually go to one or more other parties. Thus, it would seem that, in effect, the disclaiming party (the “disclaimant”) has made a gift of the property to the party who receives it as a result of the disclaimer. However, a specific section of the Internal Revenue Code (IRC §2518) specifically eliminates gift tax treatment resulting from disclaimers, provided that the disclaimer meets detailed specific requirements set forth in IRC §2518. A disclaimer meeting such requirements is referred to as a “qualified disclaimer.” In such a case the property disclaimed is treated as having passed directly from the original transferor to the party(ies) receiving it as a result of the disclaimer, as if the disclaimant had never been involved.

Qualified disclaimers are also important outside the gift tax context, for postmortem planning with respect to IRAs. Thus, for example, if it is considered in the family’s best interest to continue the tax deferral for as long as possible, the primary beneficiary may disclaim his or her interest in favor of a younger secondary beneficiary in order to have the post-death payout period based upon the younger person’s longer life expectancy. The groundwork for such post-mortem planning can be laid by the account owner’s naming of a secondary beneficiary considerably younger than the primary beneficiary.

Robert Adler, Esq. is an attorney who focuses his practice on wills, trusts and estates. He can be reached at 212-843-4059 or 646-946-8327.