Disclaimers: What They Are and How to Use Them
I’ve touched a bit on the disclaimer in earlier chapters. But let’s take this time now to dive a bit deeper. A disclaimer is a formal refusal of an inheritance (or part of an inheritance) by a beneficiary. With strategic planning, disclaimers could provide a beneficiary with the option to pass assets to alternate beneficiaries. Prior to the SECURE Act, disclaimers were an often-used estate planning technique for creating intergenerational wealth.
Since the SECURE Act essentially eliminated the “Stretch IRA,” we believe disclaimers may be used less. Throughout this guide, we’ve stressed the importance of naming beneficiaries. It is just as important to make sure you name contingent beneficiaries.
Naming a contingent beneficiary directly on the beneficiary form is a good practice and an integral part of most estate planning. It becomes vital if the first beneficiary chooses to execute a disclaimer for some reason.
When a disclaimer is executed, the person making the disclaimer is treated as if he or she had predeceased you.
The contingent beneficiary would then inherit the property. If there is no contingent beneficiary listed, often, the funds will default to your estate.
As an example:
Jack names his wife Rose as the beneficiary of his IRA and his daughter Susan as a contingent beneficiary.
Jack dies. Rose is well off, living very comfortably with her own pension, savings, and Social Security. If Rose disclaims the IRA, it will go directly to Susan. However, if Rose disclaims the IRA and no beneficiaries are listed as contingents, it will go to Jack’s estate (who knows where it will end up in that situation). Avoid that situation simply by properly naming beneficiaries and contingent beneficiaries.
For the disclaimer to be valid.
The spouse beneficiary cannot have “accepted” the property if they want to execute a disclaimer. “Acceptance” typically includes taking distributions from the account, actively transferring the account, or making investment changes within the account.
One exception does exist, however. The beneficiary is allowed to take the year-of-death Required Minimum Distribution (RMD) for a deceased account owner.
Flora is the beneficiary of her husband Harry’s IRA, and their son James is the contingent beneficiary. When Harry dies, Flora decides she does not want the IRA to come to her, but to her son James instead, and she wants to execute a disclaimer.
However, an RMD is coming due on the IRA before the end of the year, which has to be paid. Luckily, she can withdraw that RMD from the IRA without losing the right to execute a disclaimer. It is not considered “accepting” the property.
If you are going to disclaim, consult with a qualified estate planning attorney.
A disclaimer isn’t a simple form your beneficiaries can get from your IRA custodian, one that they simply sign and send back. It’s a legal document generally prepared by an estate planning attorney. As property laws are governed primarily at the state level, there may be slight variations from state to state regarding how the disclaimer must actually be executed or worded.
Disclaimers have legal deadlines.
Under the Tax Code, a disclaimer must be delivered to the IRA custodian, in writing, within nine months of the date of the IRA owner’s death. Keep in mind that disclaimers are irrevocable. Once one has been executed, you cannot change your mind. Before making a disclaimer, make sure you’ve considered all implications, including the impact on estate taxes and the possibility of leaving one beneficiary with too little and another beneficiary with too much.
The above article originally appeared as a chapter in Inheriting Your Spouse's IRA and is reprinted with permission from the author Bill Harris, RMA®, CFP®. No parts of this article may be reproduced without correct attribution to the author of this book.
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