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The federal government has allowed people in some cases to make gifts without having a gift tax liability. If the nature of the gift is a qualified "disclaimer," then it is not treated as a gift. Someone who receives an inheritance or gift, whether by beneficiary designation, will, intestate succession, or living trust may disclaim or refuse the inheritance or gift. If certain requirements are met, this is not treated as a gift but is free of gift tax.
For example, John Doe inherits $100,000 from his mother's estate when she dies. John Doe has a large estate and is making gifts to his children to reduce the estate tax at his death. He would like this $100,000 to go to his children. If he disclaims it, it goes to his children and the children receive the $100,000 and there is no gift tax involved.
One problem with disclaiming is that a person may not disclaim in favor of someone. One can only refuse the gift or inheritance and then it passes to whoever is entitled to it by law. If John Doe disclaims the $100,000 inheritance, then John Doe is treated as if he died ahead of his mother. His mother's will then controls and if he died ahead of his mother and the will provides his inheritance goes to his children, then his children receive the $100,000. If the will provides the inheritance goes to his brother, then John Doe may not wish to disclaim.
It is possible to disclaim a portion of assets that a person is receiving or a specific asset or assets. It is not necessary to disclaim everything.
Certain requirements are necessary to disclaim assets at death. These include:
Disclaiming is a good "post mortem" form of estate planning to transfer assets after death but avoid the gift tax on these assets. The disclaiming must be done promptly and in accordance with federal and California law.
Frank Doe and Mary Doe hold all of their assets in their names as community property. Frank Doe dies and his will leaves everything to his wife. The value of the couple's combined estate is over $3,000,000. Since Frank Doe owns one-half of the community property or $1,500,000, Mary Doe may disclaim a portion of the assets, or up to $1,500,000. This then goes to the children estate tax free. The wife then receives the balance of the assets, or $1,500,000. Although there are no immediate savings, upon Mrs. Doe's later death the estate tax savings may amount to $695,000, because her estate will be only $1,500,000 instead of $3,000,000.
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