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Disclaimed Gifts
One way for an asset to avoid gift
tax liability is if it is a qualified disclaimed gift. The
government does not consider a gift or inheritance to be a gift,
and it subject to the gift tax if the original recipient refused
or disclaimed it. Whether the gift came as a gift, as an inheritance,
from a will, living trust, beneficiary designation, or intestate
succession, if the person refuses it and certain other requirements
are met, it is not treated as a gift and is free of the gift
tax.
To illustrate this, let's say John Smith inherits $100,000
from his mother when she dies. John, however, already
has a sizable estate of his own and is in the process
of reducing it by making annual gifts to his children.
John would prefer it if his mother's money went to his
children, so he refuses the inheritance. If he disclaims
her gift, it passes to his children and no gift tax
is involved.
In this case John got he wanted, but that isn't always
the case. While anyone may refuse a gift, they have
no say about who then receives it. A gift may be refused,
but the next or eventual recipient of it cannot be assigned.
John can refuse his mother's gift, but after doing so,
he has no say about who gets it. When a gift is disclaimed,
it passes to the next person entitled to it by law,
not to someone selected by the original recipient.
When John Smith disclaimed his mother's gift the law
treats him as if he died before his mother. Her will
then dictates how the gift is passed. If her will provides
that anything bequeathed to John should go to his children
in the event that John predeceases her, then John's
children would receive the gift. If her will stipulates
that the inheritance goes to John's sister if John is
dead, then she would receive the gift if John disclaims
it, and that might impact his decision to disclaim it.
When someone disclaims a gift, he or she does not need
to disclaim the whole gift. A selected portion of the
gift can be refused, or a specific asset or assets.
To disclaim assets that arise from death, certain requirements
are necessary. These are:
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1. The disclaimer must be irrevocable
and it must be delivered to whoever has the assets that
are being disclaimed or to the executor of the will.
2. The disclaimer must be executed and filed with the
appropriate person within nine months following the date
of death.
3. The disclaimer must be filed before any of the assets
or benefits are received. It is not possible to disclaim
assets after they've been received. |
The best use of disclaiming gifts is as a "post
mortem" means of transferring assets to avoid the
gift taxes they will carry. To be effective, the disclaiming
must be done quickly and in accordance with both California
and federal laws.
To illustrate the benefits, John and Ann Smith have all their
assets, worth over $3,000,000, held in community property. When
John dies, his will stipulates that his assets will go to his
wife. Since John's half of the community property amounts to
some $1,500,000, Ann may choose to disclaim part of the inheritance,
or even the entire amount. The assets, if she does so, go to
the children free of estate taxes, and she retains the balance
of the community property. While there is no savings for her
on the assets she inherits, when she dies her estate will be
worth only half the original total amount, or $1,500,000, and
her survivors will only be liable for $695,000 in estate
taxes. For additional information, please contact THE MAMOLA LAW FIRM at (800) 440-5294. |
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