To reduce the size of your estate. If you're worried about estate taxes, you may want to disclaim a gift to reduce the size of your estate. In that case, it could make more sense to let the gift pass to the beneficiary next in line, rather than take the gift and risk paying estate taxes on it when you die.
So unless your estate is close to that size -- or would be with the gift -- you do not need to worry about paying estate tax. Learn more about Estate and Inheritance Taxes. To pass the gift on. If you want the gift to go to the next beneficiary, then it's more efficient to disclaim it than to accept it and pass it on yourself. In this case, a disclaimer can save a lot of hassle — particulary if the gift is real property that will have to be retitled. If you have a large estate, disclaiming the gift could also save on gift taxes — because if you take the gift and then pass it on, it will be subject to gift tax.
With a disclaimer, no gift tax is assessed because you never own the gift. Learn more about Gift Taxes. To adjust intended gifts. Sometimes gifts are not worth what the deceased person thought they would be, and the result is not what he or she intended. A disclaimer can help realize his or her wishes. Tanya Lloyd. Pamela Jarvis. I am a Senior Paralegal in the Wealth and Estate Planning team, and I work primarily in our Court of Protection team, assisting elderly and vulnerable clients.
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Simon says. Email address is not valid Unexpected error. Please contact to system administrator. We need to confirm your email address. This method was especially beneficial for younger beneficiaries who had a long remaining life expectancy, as they could "stretch" the length of time they had to take IRA distributions while allowing the remainder to grow tax-free.
This could have been a reason to pass an inheritance to a younger beneficiary in the past. Under the new legislation , beneficiaries are classified as one of three different categories: eligible designated beneficiaries EDBs , designated beneficiaries DBs , and those not considered designated beneficiaries.
Eligible designated beneficiaries EDBs are anyone designated by the IRA owner who is: 1 their spouse, 2 a minor child ren , 3 a chronically ill individual, 4 a disabled individual, or 5 someone not more than 10 years younger than the IRA owner. Non-person entities such as trusts , charities, and estates are in the third category, not classified as designated beneficiaries.
Most non-spouse beneficiaries will, therefore, fall into the second category of designated beneficiaries. This includes most adult children. Individuals in the DB category must withdraw all inherited IRA funds within 10 years of the death of the original account holder. Additionally, second-generation beneficiaries who inherit in or later are no longer able to "stretch" their distributions, even if the original IRA owner passed away prior to They will instead be subject to the year payout rules.
Therefore, if a beneficiary in the second or third classifications described above is due to receive an inheritance, it may make better financial sense to disclaim the asset if the contingent beneficiary is in the EDB category. For example, assume that John designated his adult son, Tim, as his retirement beneficiary. John passes away in February Although Tim is due to receive the inheritance, he would have to withdraw the funds over the following year period.
After speaking to an attorney, he decides to disclaim the inheritance so the funds can go to his mother. Sarah is then able to take the funds out of the account over a longer period of time using the life expectancy method. This would also be beneficial if she were in a lower tax bracket than Tim. For example, if Tim were in his prime earning years, while Sarah had already retired. If you have an IRA and you wish to give your primary beneficiary this added flexibility when they inherit the IRA, you need to plan ahead.
You should ask yourself these two questions:. To answer these questions, you'll have to find your will and double-check its contents. The form has spaces for you to name primary and contingent IRA beneficiaries. Check with your IRA custodian to confirm they have the correct information or have your lawyer check on your behalf. It is important to update your IRA beneficiary form as changes occur in your family or your personal situation e. Keep in mind that the disclaimer is irrevocable; the person who disclaims the property can't come back later, after a business fails or the stock market slumps, for example, and reclaim those assets.
Another estate-planning tool that relies on disclaimers is a disclaimer trust. You can use this type of trust to make sure your beneficiary will have an income from the disclaimed property. Assets up to the amount of your available exemption amount can transfer to the trust after your death, but the surviving spouse has nine months to decide how much to put in the trust, depending on their situation and the inheritance-tax laws at that time.
Typically, your surviving spouse will be the income beneficiary of the trust, but they cannot withdraw any principal. Following their death, the trust assets usually pass to the next beneficiary in line, thereby avoiding federal estate taxes along the way.
A disclaimer trust can give your survivors the flexibility they need to deal with shifting exemption amounts, tax laws, family needs, and net worth. Plus, it is a method of post-mortem estate planning that gives you some control over who eventually ends up with your assets. When executed correctly, a qualified disclaimer trust could save a family hundreds of thousands of dollars in federal taxes.
Sometimes, the costs of receiving a gift may be greater than the benefits of the gift, as a result of tax implications. In these cases, refusing the gift may be the tax-efficient thing to do. Trusts, as just described, and qualified disclaimers are used to avoid federal estate tax and gift tax , and to create legal intergenerational transfers that avoid taxation.
As noted above, if an individual makes a qualified disclaimer with respect to an interest in the property, the disclaimed interest is treated as if the interest had never been transferred to that person, for gift, estate, and generational-skipping transfer GST tax purposes.
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