Qualified Disclaimer

Definition

A qualified disclaimer is an irrevocable, unqualified, written refusal to accept an interest in property that meets the requirements of the Internal Revenue Code (IRC §2518). When properly executed, the disclaimed property is treated for federal gift, estate, and generation-skipping transfer (GST) tax purposes as if the disclaimant never received it.

How it works

A beneficiary who disclaims an inheritance or gift causes the interest to pass to the next-in-line (the contingent beneficiary) without creating a taxable transfer by the disclaimant. The disclaimer must be effective for tax purposes; otherwise the disclaimant may be treated as the transferor and subject to gift tax rules.

Requirements for a Qualified Disclaimer

To qualify under federal law, a disclaimer must meet all of the following:

• Be in writing and signed by the person making the disclaimer.
• Clearly identify the interest or property being disclaimed and be delivered to the person or entity holding legal title or responsible for transfer.
• Be received by the transferor (or the holder of the property interest) within nine months after the date the property was transferred. For disclaimants under age 21, the nine‑month period runs from the date the disclaimant turns 21.
• Be irrevocable and unqualified, and the disclaimant must not accept the interest or any of its benefits (once benefits are accepted, a disclaimer is not effective).

Additionally, the disclaimed interest must pass without any direction from the disclaimant (i.e., to the contingent beneficiary by operation of law, not by the disclaimant’s instruction).

Tax consequences

• If qualified: The disclaimed interest is treated as never having been transferred to the disclaimant for federal gift, estate, and GST tax purposes. The disclaimant does not incur transfer tax consequences.
• If not qualified: The disclaimant is generally treated as the transferor of the interest for gift tax purposes and may be liable for gift tax or other transfer-tax consequences.

Note: Under federal law a qualified disclaimer does not equate to the disclaimant having predeceased the decedent; some state disclaimer rules, however, treat the disclaimant as if they had predeceased the donor or decedent. Coordinate federal and state law considerations.

Estate-planning considerations

• Use qualified disclaimers to redirect assets to contingent beneficiaries in a tax-efficient way (for example, to preserve estate-tax exemptions or redirect property into another generation).
• Because disclaiming is irrevocable and strict timing/formalities apply, beneficiaries should consult an attorney or tax advisor before acting.
• In many cases it can be preferable to accept property, pay any taxes, and then sell or transfer it rather than disclaiming—evaluate tax costs, liquidity needs, and the wishes of the deceased and contingent beneficiaries.

Key takeaways

• A qualified disclaimer lets a beneficiary refuse an interest so it passes to someone else without creating federal gift, estate, or GST tax consequences for the disclaimant.
• The disclaimer must be written, signed, timely (usually within nine months), irrevocable, and result in the interest passing by operation of law to a person other than the disclaimant.
• Failure to meet the requirements results in potential gift/transfer tax liability for the disclaimant; professional guidance is recommended.