Home › Latest News
It's the Law: Sometimes rejecting an inheritance saves taxes
More Latest News 
Share and Enjoy 
Q: My spouse died recently. He left me everything in his will. I met with my attorney, who suggested that it might be a good idea for me to refuse part of my husband’s assets to save estate taxes. I am confused, because I thought everything given to a spouse in a will is tax free. Please explain.
A: Your situation is not uncommon. Many married couples arrange for preparation of simple estate planning documents under which the survivor owns everything, and upon death of the survivor, the family assets go to the children. Some of these plans were prepared years ago when the couple had few assets. Inflation alone can increase net worth. In some cases, the couple did far better than inflation. This can create a taxable estate.
You are correct in understanding that United States citizens can give an unlimited amount of wealth to their United States spouse, without incurring estate taxes. If you accept all of your husband’s assets, there will be no estate tax due as a result of his death. But, when you die, and assuming you do not leave everything to a new spouse, your estate may be subject to estate taxes.
In 2007, each person has an estate tax exemption equivalent of $2,000,000. Assets in excess of $2,000,000 are taxed at a rate of about 50 percent.
The simple way to protect the $2,000,000 exemption in the estate of both spouses is to create a trust from the estate of the first spouse to die that does not pass directly to the surviving spouse. The surviving spouse can receive all of the income from that trust and even principal if needed. But, the trust is considered a gift to the beneficiaries that will receive the principal upon death of the second spouse and is not taxed in the estate of either spouse. As an additional benefit, any increase in value also escapes estate taxes in both estates.
In your case, it sounds like you will not need all of the assets owned by you or your husband. That’s why your attorney has suggested that you not accept all of the gifts in his will. To do this, you must utilize a qualified disclaimer.
If you disclaim assets, they will be distributed as if you pre-deceased your husband. That means the beneficiaries named in your husband’s will receive assets in the event you pre-deceased your husband.
There are technical requirements under both Florida and federal law to disclaim assets. Those requirements generally require that the disclaimer be in writing, that it be completed within nine months of death of the asset’s owner, that the person disclaiming has not benefited from the proceeds of the disclaimed property nor exercised any incidents of ownership with respect to the property and the person disclaiming cannot receive the assets indirectly.
A disclaimer can be used with assets passing under a will, distributions from a trust, distribution from an IRA, and even to disclaim a decedent’s interest in property owned as joint tenants with right of survivorship. However, the person disclaiming cannot control or affect who gets the asset and it passes to the alternate beneficiaries in the will, trust or IRA.
Because of changing tax laws, we have built many estate plans around the right of a surviving spouse to disclaim. In simple terms, we prepare a will or living trust under which all assets are distributed to the surviving spouse. If the surviving spouse disclaims assets, they pass to a disclaimer trust, from which the surviving spouse receives income until death, at which time the remaining assets in the disclaimer trust are distributed to children or other beneficiaries. This allows more flexibility in tax planning than a mandatory distribution to a similar trust, which can be useful where the future of estate taxes is unclear.
I suggest you discuss the concept of disclaimer in greater detail with your attorney. Before making a final decision, do not accept the benefits of any assets that might be disclaimed. The disclaimer provides an opportunity to avoid taxes and “fix” a bad estate plan, but only when the technical requirements for disclaimer are met in a timely fashion.
---
William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@earthlink.net or by fax to (239) 642-0722. Read other columns at http://www.wgmorris.com.
Comments
This site does not necessarily agree with comments posted below — responsibility lies with the relevant reader alone. Read our privacy policy & user agreement.
Post your comment
(Requires free registration.)