Unqualified Disclaimers Can Create an Unexpected Tax Bill
Posted by William Byrnes on October 27, 2010
A disclaimer in the estate planning context is a voluntary refusal to accept a gift from a will. A properly structured disclaimer can be a great tax planning technique, allowing the person making the disclaimer to pass a gift on to the next person in line—for instance, someone in the next generation—without being subject to the gift tax. But a disclaimer should not be made lightly because a disclaimer that is not “qualified” for tax purposes can create serious gift tax consequences for the person making the disclaimer.
The danger of an improperly made disclaimer was clearly illustrated in a recent U.S. District Court, Estate of Tatum v. U.S. There, Son disclaimed his interest in the residue of his father`s estate. But because Son`s disclaimer was not a qualified disclaimer, Son was treated as if he received the gift and then made a taxable gift to his children, resulting in a gift tax bill for Son and his wife of over $1,600,000.
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For in-depth analysis of qualified disclaimers, see the AUS Main Libraries Section 7 B1—What Transactions Constitute Taxable Gifts