Q. My mother just died, and her Will leaves her estate equally to us three children. I am fairly well-off, but my two brothers are not quite as fortunate. Is there a way that I can redirect some or all of my share to them in a tax efficient way?
A. The answer may very well be “yes.” One way to accomplish this is by the use of a disclaimer. A disclaimer is a renunciation of one’s right to receive a gift or bequest, whether the gift is left in a will, trust, or by beneficiary designation.
However, whether it will accomplish your purpose in routing your share to your siblings depends upon how your mother structured the bequest in her will. Here is why: in order for a disclaimer to be effective, it must pass to the next person in line without any direction on your part. In other words, it must pass to the successors whom your mother, herself, has chosen to take in the event you predeceased her. A couple of examples will help illustrate the matter:
Example #1: let us suppose your mother’s will recites as follows:
“ I leave everything to my three children, equally, but if any of my children predeceases me, then I leave that deceased child’s share to my other surviving children, equally.”
Example #2: now, let us suppose your mother’s will, instead, recites as follows:
“ I leave everything to my three children, equally, but if any of my children predecease me, then I leave that deceased child’s share to his own surviving children”.
In example #1, your mother provides that the share of any predeceased child would go sideways to your siblings, while in example #2, she provides that it would go downward to the deceased child’s own children. In example #1, a disclaimer by you would accomplish your purpose, but a disclaimer by you in example # 2 would not.
A disclaimer is treated as if the disclaiming beneficiary had predeceased the decedent. So, before exercising a disclaimer, it is very important to first determine whom the decedent, herself, has selected as the successors. If the decedent died without a will, then the successors would be determined by state law.
The nice thing about a disclaimer is that it is treated for tax purposes as if you never owned the asset; it passes to the successors without any adverse tax implications to you. As a result, a disclaimer can be a very tax efficient way of doing post-mortem planning. By contrast, if you first accept your share and then re-gift it to your siblings, the gift tax scheme would be implicated: you would need to file a Gift Tax Return for amounts over $17,000 per recipient (in year 2023), and the gifts to your siblings would reduce your own lifetime exemption from gift and estate tax (currently $12.92 Million per person, in 2023), making less available for you later on to shield bequests to your own beneficiaries. Note: that current, high estate tax exemption of $12.92 Million per person is scheduled to reduce dramatically for persons dying after 2025, unless the federal tax law is statutorily amended before then.
To be effective, a disclaimer must meet certain requirements: it must be in writing, it must be made before you accept the gift or any of its benefits, and it must be made not later than nine months after your mother’s death. Caution: a person receiving public benefits, such as Medi-Cal or SSI, should never make a Disclaimer without getting professional guidance, as doing so would be treated as a prohibited transfer of assets and could jeopardize continued eligibility for public benefits.