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DISCLAIMING AN
INHERITANCE: HOW TO DO IT
INTRODUCTION:
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.
THE BASICS:
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.
CONCLUSION:
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. |
