Gerald Kramer
The AZ CPA
4531 N 16th St
Suite 126
Phoenix, AZ 85016
(602) 264-9331
Fax: (602) 279-1766
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TAX TIPS
Don't Need That Big Inheritance?
Maybe A Disclaimer Can Help
An inheritance is generally a windfall to be enjoyed. However, there are times when accepting an inheritance can result
in tax consequences that greatly decrease the potential benefit brought by the bequest. A Disclaimer is a way of saying, "I don't want this inheritance" that allows for "after the fact" estate planning in cases when the financial results of a decedent's passing may have harmful tax or other consequences for the beneficiary. Disclaimers are carried out by executing a written statement rejecting the inheritance. The inheritance then automatically passes to the next beneficiary in line to receive the inheritance. The tax advantages of this technique can be considerable, since estate taxes are currently as much as 50 percent.
Here, the Smith family uses a Disclaimer to avoid some potentially serious estate taxes. Mr. and Mrs. Smith each have $1 million in assets. Upon Mr. Smith's death, his assets go to his wife. Since the amount of his estate is equal to his estate tax exemption ($1 million in 2002), it is not subject to estate tax. Upon the passing of Mrs. Smith, however, the combined estate, now totaling $2 million, could be liable for estate taxes as high as $435,000! However, if Mrs. Smith makes use of a Disclaimer at the time of her husband's death, allowing his $1 million is assets to pass on to their children (tax-free!) upon her death, her estate is now at the $1million exemption and not subject to any estate tax. The resulting estate tax bill? Zero. The tax result would be the same if the disclaimed interest passes to a Family Trust from which Mrs. Smith could get income and principal distributions.
Disclaimers can also be used to provide for financial contingencies where another family member can benefit from an inheritance more than the initial beneficiary. Again, a Disclaimer can be a good way to pass money on to another party. In reality, there are times when not getting an inheritance is better than getting one. For those times, the Disclaimer can be the perfect tool for the job.
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