One definition of “disclaim” is when a person denies or renounces a claim to some thing or some right. In the context of estate administration, when a person disclaims, they are renouncing part or all of their right to receive under a Will, Trust or by operation of law.
The IRS recognizes that under the right circumstances, a beneficiary may disclaim part or all of an inheritance or gift and if done properly, that it’s as if the gift or devise never occurred. This type of disclaimer recognized by the IRS is what is known as a “qualified disclaimer.”
An example of where a qualified disclaimer might be used is where a deceased person names their spouse as primary beneficiary of an IRA and names their adult child as contingent beneficiary. If, for personal, tax or financial reasons the spouse does not want to receive the IRA and wants it to go to the child, the spouse can execute a qualified disclaimer. This instrument will mean that the IRA passes directly to the child as if the spouse had not been named. This can protect any tax deferral associated with the transfer. If the spouse did not disclaim but instead collected the IRA and then gifted it to child, then there would be income taxes owed immediately.
In order to make a qualified disclaimer, the IRS has very specific criteria which must be met. For this reason, any beneficiary of a Will or Trust may wish to consult an experienced probate estate attorney.
In a separate blog, we will discuss what is required to make an qualified disclaimer.