How Qualified Disclaimers Make Estate Planning More Flexible

Jan 18, 2019 9:00:00 AM


A key element of estate planning is to remember that things change. Assets today might not be available down the road. At the same time, assets might grow and require money to be moved around or reallocated when a spouse passes away.

The best estate planning strategies offer flexibility so that loved ones can analyze situations and make decisions when someone passes away. Rather than adhering to stiff plans with complex trust structures, estate planners can add flexibility and achieve significant tax advantages through the use of qualified disclaimers.

What is a Qualified Disclaimer?

A qualified disclaimer is a refusal to accept property or assets bequeathed in a will or similar document. When the beneficiary of an estate or trust submits a qualified disclaimer, the IRS permits the property to skip to the next person in line. For tax purposes, it is as though the beneficiary never receives any interest in the property.

Several scenarios exist where qualified disclaimers can be beneficial. A beneficiary might not want the money because he or she already has enough assets and prefers for his or her children or grandchildren to receive the gift.

To be valid, a qualified disclaimer must meet the following requirements:

  • Must be in writing.

  • Must be made within nine months of the testator’s or trustor’s date of death.

  • The beneficiary must not have accepted any interest in the gifted asset. The interest must pass without any direction on the part of the person making the disclaimer.

  • The interest must pass to a person other than the disclaimant.

Qualified disclaimers allow for a “wait-and-see approach” to evaluate estate taxes, family dynamics, and beneficiary wealth at the time of a testator or trustor’s death. They prevent spouses from being handcuffed to decisions and provide marital share distribution flexibility.

How are Disclaimers Set Up in Estate Planning?

Establishing an A/B Trust structure allows married couples to combine their estate tax exemptions ($11.4 million per individual in 2019) and maximize tax savings for their estate.

In this approach, when one spouse passes away, that spouse’s assets funds the A Trust (also known as a marital deduction trust) and any amount disclaimed by the surviving spouse funds the B Trust (also known as a bypass or credit-shelter trust) for the benefit of their children or other beneficiaries. In many cases, the deceased spouse’s tax exemption is utilized for the B Trust.

The surviving spouse cannot retain limited power of appointment over the disclaimed assets.

When is the Clayton QTIP Election Beneficial?

An alternative strategy is the Clayton election, which is an adaptation of the A/B disclaimer strategy.

In this scenario, assets are funded into the B trust and a qualified terminable interest property (QTIP) election can be made over some or all of those assets. A QTIP does not provide estate tax protection but is a more favorable strategy for getting a step-up in basis upon the death of the surviving spouse. Any portion the estate not elected to qualify for the estate tax marital deduction remains in the bypass trust.

Some of the requirements for a QTIP include:

  • Surviving spouse must be the only beneficiary.

  • All income must be distributed to the surviving spouse every year at a specified interval.

  • Non-productive property must be allowed to be converted to productive property.

Both qualified disclaimers and Clayton elections can be advantageous estate planning strategies for maximizing flexibility. A thorough evaluation of client circumstances and goals will help determine which strategy is more appropriate.




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