A disclaimer strategy can save estate tax. Suppose, for example, Dave Andrews has millions of dollars of assets while his wife Ellen has $1 million of her own. Ellen dies and leaves her assets to Dave. No estate tax will be due at Ellen’s death because transfers to spouses aren’t tax.
But the $1 million that Dave inherits could cost his estate $500,000 at his death, to federal and state estate tax. What’s more, Dave doesn’t really need that $1 million.
A savvy plan would have allowed Dave to disclaim (renounce) that $1 million. Then the money would pass to another beneficiary already named in a will or a trust or an IRA beneficiary form.
If Dave disclaims that $1 million to his children, he keeps those assets from his taxable estate, without having to pay gift tax. If the estate plan has been set up properly, a primary beneficiary has nine months after a decedent’s death to disclaim in favor of a secondary beneficiary.
