There are times when a person inheriting under a Will, by intestate succession or by Trust wishes to avoid the vesting of the property. Such decisions may be necessary because of the existing estate plans and tax situation of the person inheriting or because the person inheriting does not wish certain property in the Will or Trust to be treated in the manner provided in the Will or Trust or characterized in a particular manner, e.g. as separate or community, etc. The reader should review our article on Wills and Trusts as well as Probate and Community Property Set Asides before reading further.
Perhaps some typical examples should illustrate when disclaimer may be important:
1. A person in ill health and with an estate already likely to be taxed heavily who does not need the inheritance realizes that the person next in line in the Will or Trust can use the money and will not likely face large estate taxes in the near future.
2. A person who wishes to claim a community property interest in a property is given twenty percent of it in the Will and, instead, will insist on taking fifty percent of the property due to its community property nature.
3. A person facing personal bankruptcy, thus likely to lose the inheritance in any event, wishes the money to pass directly to his or her children, next in line in the Trust, and never to vest in him or her.
And there are literally hundreds of other examples of when disclaimer may make sense for a person to consider.
Disclaimer should never be entertained minus advice of experienced counsel and accountants. Nevertheless, should a person elect to disclaim an inheritance in California, the following procedures and definitions are relevant.
A “Disclaimer” means any writing which declines, refuses, renounces, or disclaims any interest that would otherwise be taken by a beneficiary.
The procedure for creating a disclaimer according to California Probate Code Section 278-286, 288 is as follows:
1. Form Requirements:
The disclaimer shall be in writing, and shall be signed by the disclaimant, and shall:
(a) Identify the creator of the interest.
(b) Describe the interest to be disclaimed.
(c) State the disclaimer and the extent of the disclaimer.
2. Time Requirements:
(a) In order to be effective, a disclaimer must be filed within a reasonable time after the person able to disclaim acquires knowledge of the interest.
(b) In the case of any of the following interest, a disclaimer is conclusively presumed to have been filed within a reasonable time if it is filed within nine months after the death of the creator of the interest or within nine months after the interest becomes indefeasibly vested, whichever occurs later:
(1) An interest created under a will.
(2) An interest created by interstate succession.
(3) An interest created pursuant to the exercise or non-exercise of a testamentary power or appointment.
(4) An interest created by surviving the death of a depositor of a Totten trust account or P.O.D. account.
(5) An interest created under a life insurance of annuity contract.
(6) An interest created by surviving the death of another joint contract.
(7) An interest created under am employee benefit plan.
(8) An interest created under an individual retirement account, annuity or bond.
(c) In the case of an interest created by a living trust, an interest created by the exercise of a presently exercisable power of appointment, an outright inter vivos gift, a power of appointment, or an interest created or increased by succession to a disclaimed interest, a disclaimer is conclusively presumed to have been filed within a reasonable time if it is filed within nine months after whichever of the following times occur latest:
(1) the time of the creation of the trust, the exercise of the power of appointment, the making of the gift, the creation of the power of appointment, or the disclaimer of the disclaimed property.
(2) The time of the first knowledge of the interest is acquired by the person able to disclaim.
(3) The time the interest becomes indefeasibly vested.
(d) In case of an interest not described in subdivision (b) or (c), a disclaimer is conclusively presumed to have been filed within a reasonable time if it is filed within nine months after whichever of the following times occur later:
(1) Nine months after the time the interest becomes an estate in possession.
(2) The time specified in subdivision (b), (c), or (d), whichever is applicable.
If the disclaimer is not filed within the time provided in subdivision (b), (c), (d), or (e), above, the disclaimant has the burden of establishing that the disclaimer was filed within a reasonable time after the disclaimant acquired knowledge of the interest.
Note that this does not mean the disclaimer can not be established. It means that it is no longer conclusively presumed to be valid and the burden of demonstrating the “reasonableness” of the timing of the disclaimer is upon the person asserting the disclaimer.
The person contesting the reasonableness will, of course, depend on the property interests at stake. It could be the Trustee; the executor; family members-or the taxing authorities.
3. How To File:
A disclaimer may be filed with the trustee, personal representative, other fiduciary or person responsible for distributing the interest to the beneficiary.
4. The Effect:
A disclaimer, when effective, is irrevocable and binding upon the beneficiary and all persons claiming by, through, or under the beneficiary, including creditors of the beneficiary. Keep this in mind: one cannot change one’s mind once the disclaimer is achieved and once it is achieved, the effect is usually equivalent to the person who otherwise would have received the asset never having received the asset in any manner.
A wise elderly attorney long used to complex estate planning once commented that a disclaimer was simply one more tool to be used in effective estate planning. Since circumstances can alter long after a Will, Trust or estate plan is created, this can give a beneficiary the chance, if advised correctly, to created a more appropriate plan.
But it can also be far from benign, and many disclaimers arise due to existing struggles within a family, divorces that were planned but not commenced at the time of death, or desires to shift tax burdens to others.
And someone creating a Trust or Will must consider how a disclaimer by one or more of the beneficiaries would alter the plan and consider appropriate provisions accordingly.
Whatever the purpose, it is absolutely vital for a person considering use of such a tool to both act with alacrity and seek experienced legal and tax advice before disclaiming any interest. Since they are irrevocable, this can be a decision that could very well alter one’s well being significantly and should only be undertaken with care and appropriate input.