About Disclaimers

In yesterday’s post, I described an idea for how your heirs can utilize a disclaimer after your death. I don’t usually like to write about death in this retirement planning forum; it's just not seemly. But I suppose it’s appropriate for me to summarize the ground rules governing disclaimers. Someone has to do it. Here goes.

What is a disclaimer? Imagine you are entitled to receive something as a result of someone else’s death—a bequest; a house; life insurance proceeds; a retirement account; whatever. Now imagine—and this is the hard part—you don’t want it. You can simply refuse to accept it, and then it goes to the next person in line, just as if you had died before your benefactor. That’s a disclaimer.

If the disclaimer is handled properly, then for tax purposes it’s treated as if you had never been entitled to the property in the first place. It’s treated as if the deceased person had instead left it to the ultimate recipient instead of you. If the property is a retirement account, like an IRA, here’s what that means:
• Most significantly, the ultimate recipient, and not you, becomes entitled to the account. Duh.
• The ultimate recipient, and not you, pays income tax on distributions (unless it’s a Roth account). That could be a good thing for the family if the ultimate recipient is in a lower tax bracket as typically happens when he is one or two generations younger.
• The ultimate recipient’s life expectancy governs required minimum distributions, rather than yours. That would enhance the tax deferral benefits of the retirement account if the ultimate recipient is a generation or two younger than you.
• The estate tax consequences of the retirement account are determined as if the account was left directly to the ultimate recipient. (The import of that statement will just have to wait for another day.)

So that’s it in a nutshell. Tomorrow’s post will summarize the ground rules for properly implementing a disclaimer.