How to understand a disclaimer of property

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A disclaimer is an estate planning tool that allows you to redistribute transfers of property free from transfer taxes. A disclaimer is your refusal to accept a gift, bequest, or other form of property transfer. Once disclaimed, the property is then distributed to the next recipient. As a disclaimant, you are not regarded as having received the property, or having transferred the property. As a result, no gift, estate, or generation-skipping transfer tax is imposed on your disclaimer of the property.

After you receive the gift or bequest, you generally have up to nine months to decide whether to disclaim the property. During that period, you may not accept any of the benefits of the property if you ultimately decide to disclaim it. When you disclaim the property, you may not direct who is to receive it. The property passes as if you never held an interest in it. For example, you disclaim property left to you by your spouse, and it then passes to your children under the terms of your spouse’s will.

The disclaimer must generally be in writing, be signed, and specifically identify the interest in the property being disclaimed. Depending on the type or the ownership of the property, Iowa State law may impose other requirements, such as that the disclaimer may need to be acknowledged, witnessed, or recorded. More specifics can be found in Chapter 633 E of the Iowa Code.

Some reasons to disclaim property:

  • You already have enough property.
  • You can shift income-producing property to someone in a lower income tax bracket. (However, unearned income of a child subject to the kiddie tax may be taxed at your income tax rate. The kiddie tax rules apply to 1) those under age 18; 2) those age 18 whose earned income doesn’t exceed one-half of their support; and 3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support).
  • Disclaiming the property, or an interest in the property, may enable the property to qualify for a marital or charitable deduction.
  • Disclaimers can be used to make changes to an estate plan at a later time.

Consult an estate planning attorney in order to fully understand the pros and cons of using the disclaimer of property strategy.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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