DEFINITION of 'Qualified Disclaimer'

A qualified disclaimer is a refusal to accept property that meets the provisions set forth in the Internal Revenue Code (IRC) Tax Reform Act of 1976 allowing for the property or interest in property to be treated as an entity that has never been received. Section 2518 of the IRC permits a beneficiary of an estate or trust to make a qualified disclaimer so that it is as though the beneficiary never received the property, for tax purposes.

BREAKING DOWN 'Qualified Disclaimer'

Sometimes, the costs of receiving a gift may be greater than the benefits of the gift, as a result of tax implications. In these cases, refusing the gift may be the tax-efficient thing to do. The disclaim of any gift or bequest is known as a qualified disclaimer, for federal income tax purposes. The Internal Revenue Service (IRS) defines a qualified disclaimer as an irrevocable and unqualified refusal by a person to accept an interest in property. Qualified disclaimers are used to avoid federal estate tax and gift tax, and to create legal inter-generational transfers which avoid taxation, provided they meet the following set of requirements:

  1. The disclaimer is made in writing and signed by the disclaiming party. In addition, s/he must identify the property or interest in property that is being disclaimed. The disclaimed interest must then be delivered, in writing, to the person or entity charged with the obligation of transferring assets from the giver to the receiver(s).
  2. The writing is received by the transferor of the interest, his legal representatives, or the holder of legal title to the property to which the interest relates in less than nine months after the date the property was transferred. In the case of a disclaimant aged under 21, the disclaimer must be written less than nine months after the disclaimant reaches 21.
  3. The disclaimant does not accept the interest or any of its benefits. In effect, once an individual has accepted the property, s/he cannot disclaim it.
  4. As a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either to the spouse of the decedent, or to a person other than the person making the disclaimer.

Only if these four requirements are met can the disclaimant be treated as if s/he never received the gift in the first place. The disclaimed property is then passed to the "contingent beneficiary" by default, that is, to a party other than the original stated beneficiary of the gift or bequest. Basically, the property passes to the contingent beneficiary without any tax consequence to the person disclaiming the property, provided the disclaimer is qualified. Under federal tax law, if an individual makes a "qualified disclaimer" with respect to an interest in property, the disclaimed interest is treated as if the interest had never been transferred to that person, for gift, estate, and generational-skipping transfer (GST) tax purposes. Thus, a person that makes a qualified disclaimer will not incur transfer tax consequences because s/he is disregarded for transfer tax purposes. The federal law does not treat the disclaimant as if he or she had predeceased the decedent. This is contrary to many states' disclaimer laws in which disclaimed property interests are transferred as if the disclaimant had predeceased the donor or decedent.

Due to the strict regulations that determine whether disclaimers are considered "qualified" according to the standards of the IRC, it is essential that the renouncing party understand the risk involved in disclaiming property. In most cases, the tax consequences of receiving property fall far short of the value of the property itself. It is usually more beneficial to accept the property, pay the taxes on it, and then sell the property, instead of disclaiming interest in it.

If a disclaimer does not meet the four requirements listed above, then it is a nonqualified disclaimer. In this case, the disclaimant, rather than the decedent, is treated as having transferred his or her interest in the property to the contingent beneficiary. Additionally, the disclaimant is treated as the transferor for gift tax purposes and will need to apply the gift tax rules to determine whether s/he made a taxable gift to the contingent beneficiary.

When used for succession planning, qualified disclaimers should be used in light of the wishes of the deceased, the beneficiary, and the contingent beneficiary.

  1. Disclaim

    To disclaim is to renounce an interest or obligation by way of ...
  2. Disclaimer Trust

    A disclaimer trust is one that has embedded provisions that allow ...
  3. Forward Looking

    "Forward looking" is a business term for predictions about future ...
  4. Transfer Tax

    A transfer tax is any kind of tax that is levied on the transfer ...
  5. Gift Inter Vivos

    A gift inter vivos, which is Latin for between the living, is ...
  6. Uniform Transfer Tax

    Uniform transfer tax refers to a combination of two kinds of ...
Related Articles
  1. Retirement

    Disclaiming Inherited Plan Assets

    There are good reasons to not accept inherited assets, but be sure you follow the proper process.
  2. Retirement

    September 30: A Key Date For Retirement Plan Beneficiaries

    Unless certain action is taken by this date, distribution rules can put the youngest inheritor at a disadvantage.
  3. Taxes

    What the Gift Tax Rules Mandate

    The lifetime maximum for gift taxes is now $5.6 million. Here's how the gift tax works.
  4. Retirement

    How to Minimize Estate Taxes via Charitable Giving

    Here are several ways to reduce your taxable estate while providing a gift to a worthwhile cause.
  5. Retirement

    Why Estate Planning Isn't Just for the Rich

    Estate planning isn't just for the wealthy. These estate transfer strategies can help you leave more to your heirs.
  6. Taxes

    Sell Your Rental Property for a Profit

    Learn how to sell your rental property for a profit. Find out how to master the selling process.
  7. Taxes

    Avoid Capital Gains Tax on Your Home Sale

    If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer.
  8. Personal Finance

    Which States Are Community Property States?

    There are nine community property states. Here's what 'community property' means when a couple divorces.
Trading Center