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High-Wealth Beneficiaries Seek Protection from Taxation with Disclaimer Exemption

Since federal income tax rule changes in 2017, estate planners will find disclaimers to be a better exemption tool than before. A disclaimer allows for adjustment to an estate or trust for purposes of shifting tax liability from high-wealth beneficiaries. U.S. Internal Revenue Service ({“IRS”) guidelines allow for disclaimer by a beneficiary (“disclaimant”) to bypass taxation with a default transfer to a beneficiary eligible for estate or gift tax exempt status. Disclaiming parties may not be enriched by estate assets once disclaimed or entitled to name the beneficiary whom those assets will pass to as result.

Interested estate parties can consult with an attorney about the benefits of disclaimer provisions “qualified” under federal law (Title 26 Revenue Code USC §. 2518).  Disclaimer modification of an estate, trust, or will must be made in writing within nine (9) months from the death of the decedent.

Disclaimer

Disclaimers fall under the provision of New York Consolidated Laws, Estates, Powers and Trusts Law – EPT § 2-1.11 Renunciation of property interests for transfer of estate or trust assets for purposes of tax exemption after the death of a decedent. Disclaimers enable a surviving spouse to derive full tax-exempt benefit from a marital trust and allow for bypass of assets to future generations for tax savings on all or a portion of an estate’s assets. Transfer taxes can be minimized or avoided if the testamentary plan’s disclaimed assets default to grandchildren if children are substantially wealthy or have reason to be anticipate income tax obligation in the future.

Limitations

It is important to note that renunciation made in compliance with the provisions of New York law do not always coincide with the rules of “irrevocable” and “unqualified” disclaimer. According to New York law “disposition or transfer created by any testamentary or nontestamentary instrument [such as a will, estate, trust, or gift], or by operation of law, and any of the foregoing created or increased by reason of a renunciation made by another person” must be approved by the courts (EPT § 2-1).

Under New York law, a beneficiary may elect which dispositions to accept or renounce or renounce a fractional share of assets. Court authorized guardians of minor children; conservators of mentally incompetent adults; or attorney-in-fact authorized under a duly executed power of attorney are eligible for renunciation on behalf of a beneficiary. The statute of limitations renunciation of property interests is the effective date of a disposition – the future date of possession. Rules of renunciation do not apply to spousal rights to disposition.

Contact an Estate Law Attorney

An attorney at law can provide information about the latest federal and state tax laws affecting estate and trust transfers. Ettinger Law Firm is a licensed attorney practice offering estate planning and probate litigation services in New York. Contact Ettinger Law Firm for consultation about an estate or trust-related tax matter.

See Related Blog Posts:

Benefits of an Irrevocable Trust

Tax Issues to Consider When Closing an Estate

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