Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Qualified Disclaimer

What it is:

A qualified disclaimer is a formal refusal to accept interest in property bequeathed in a will or similar document. 

How it works (Example):

Section 2518 of the Internal Revenue Code permits the beneficiary of an estate or trust to make a qualified disclaimer so that for tax purposes it is as though the beneficiary had never received any interest in the property.

Generally, a person can write a will in which he leaves his estate to a survivor, and that will can contain a special clause directing that if the survivor makes any qualified disclaimer in the estate, the disclaimed property will pass into a trust for the benefit of the survivor. When applied properly, a qualified disclaimer can help property pass to contingent beneficiaries without any tax consequence to the person disclaiming the property.

A qualified disclaimer must meet the following requirements:

  1. It must be in writing.
  2. It must be received by the property owner (or the property owner's legal representative) within nine months of the date of the transfer or by the transferee's 21st birthday.
  3. The transferee has not already accepted an interest in the property.
  4. The property must pass to someone other than the person making the qualified disclaimer.

The person disclaiming the property cannot direct how the disclaimed interest is distributed; rather, the disclaimed interest must pass according to the transferor's directions. Additionally, it is possible to disclaim a portion of property if it is severable into portions. However, a person cannot disclaim property in order to qualify for Medicaid.

Why it Matters:

Qualified disclaimers offer flexibility in estate planning by essentially offering a way to change the provisions of a will to obtain more favorable tax consequences and/or to ensure that the property passes to contingent beneficiaries in the event the primary beneficiary is deceased or chooses not to accept the property. An executor or a trustee might also disclaim property in order to ensure that another estate is taxed at the lowest possible rate.