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What is Postmortem Estate Planning? Postmortem Estate Planning is altering property dispositions set up
by will, trust, deed or joint ownership to fit family objectives and save income or estate taxes. Most commonly
it is a way for a surviving spouse to pass property to succeeding generations on a tax-advantaged-basis,
especially if the surviving spouse already has adequate resources. It is altering property dispositions to make
repairs in an estate plan which, for one reason or another, were not accomplished during lifetime.
Sometimes it is a method to more fully utilize the lifetime federal estate tax exemption and accomplish a step-
up in basis which might not otherwise be available. In other cases disclaimers can be used to avoid punitive
generation skipping taxes.
What is a Disclaimer? A Disclaimer is a legal formality which means, as the name implies, the "non-
acceptance" of a property interest rather than a transfer of that property interest to the new recipient. The
person disclaiming the interest is treated as never having received it. Therefore, that person is not making a
gift to the ultimate recipient. This can mean a saving in gift and estate taxes at a minimum.
When is a Disclaimer Helpful? Spousal Disclaimers are the most common where a surviving spouse
disclaims a property interest to fill up a credit shelter trust or pass property directly to the next generation.
Disclaimers have also been used effectively to fend off Generation Skipping Transfer Tax (GST Tax) where the
provisions of a Trust or a Will have intentionally or inadvertently triggered a large GST Tax by transfers to the
grandchildren or lower generations in excess of available exemptions. The GST tax exemption is now
$1,500,000, but in larger estates with multi-generational estate plans, the writer has seen GST tax savings in
the high six figures by use of the disclaimer technique.
How is a Disclaimer Accomplished? The objective of the disclaimer is to avoid having the action be a
"transfer" or gift by the disclaiming party. The Disclaimer must meet the requirements of state law as far as
property rights are concerned and must meet the requirements of the Internal Revenue Code as far as gift
and estate taxes are concerned. A Disclaimer which meets the requirements of the federal law is called a
"Qualified Disclaimer".
To be a "Qualified Disclaimer" under IRC Section 2518, the Disclaimer must meet a number of requirements
as follows:
- Must be made within nine months after the day of transfer (usually death), or within nine months after
the disclaiming party reaches age 21. - The disclaiming party must not have accepted the interest or any benefit thereof.
- The Disclaimer must be in writing delivered to the transferor and must pass without any direction of
the disclaiming party to some other person.
To put it simply, the disclaiming party is treated as having predeceased the transferor and therefore cannot
have directed the distribution of property which might otherwise occur.
Michigan law follows the federal guidelines but without any time limit. Therefore, a disclaimer that is valid
under Michigan law, but beyond the time limit for a "Qualified Disclaimer" would be a taxable gift by the
disclaiming party. With the lifetime gift exemption of $1 million, this might or might not be a problem.
Spousal Preference. There are specific exceptions in the federal tax law for surviving spouses. In other words,
a surviving spouse can disclaim a direct transfer of property with a resultant transfer under the terms of the
governing instrument to a trust for the spouse’s benefit. Otherwise, the disclaiming party is not allowed to
receive or obtain a benefit in the property being disclaimed.
Joint Property. Often Disclaimers are used effectively where a surviving spouse acquires title to real estate
and joint accounts held jointly by husband and wife prior to the first death. Now with the federal estate tax
lifetime exemption of $1.5 million per person, Disclaimers can fill up a Credit Shelter Trust and save
significant potential taxes that might be due at the death of the surviving spouse.
Federal Regulations on Joint Property. Federal regulations on the tax effects of creating or disclaiming
interests in joint property depend on whether the gift is a perfected gift such as a creation of a joint tenancy in
real estate and an imperfect gift such as creation of a joint bank or brokerage account. If the gift is perfected,
that means it can’t be undone without the consent of all parties. If the gift is imperfect, either joint owner can
withdraw all of the property at any time, without the consent of the other. The federal rules for disclaimers vary
depending on what kind of joint property interest is involved. The consequences of a Disclaimer may depend
not only on the type of the property but which joint owner contributed to the property interest involved.
Needless to say, for joint property interests which have been in effect for a long time, the percentage of
contributions, for example, by husband and wife, may be difficult to determine.
Conclusion. Where large taxable estates are concerned, postmortem estate planning is an essential part of
tax minimization. The big catch is that it must be done promptly after death so that any necessary options can
be taken within the nine month window. It’s best not to be both late and sorry.
If you feel that one of your clients can benefit from postmortem estate planning, reviewing documents and
assets with a view toward saving gift or estate taxes, please contact, please contact Jim Modrall at 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| March 2004 POSTMORTEM ESTATE PLANNING - DISCLAIMERS by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |