You may use a qualified disclaimer to refuse a bequest from a loved one. Doing so will cause an asset to bypass your estate and go to the next beneficiary in line. What are the reasons you’d take this action? Here are five reasons:

1. Gift and estate tax savings. This is often cited as the main incentive for using a qualified disclaimer. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to nonspouse beneficiaries, such as your children and grandchildren, may be covered by the gift and estate tax exemption.

Currently, the exemption can shelter a generous $11.58 million in assets for 2020. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $23.16 million in 2020 to their heirs free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. By using a disclaimer, you ensure that the exemption won’t be further eroded by the inherited amount. Assuming you don’t need the money, shifting the funds to the younger generation without it ever touching your hands can save gift and estate tax for the family as a whole.

2. Generation-skipping transfer (GST) tax. Disclaimers may also be useful in planning for the GST tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is $11.58 million for 2020.

If GST tax liability is a concern, you may wish to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from the GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

3. Family businesses. A disclaimer may also be used as a means for passing a family-owned business to the younger generation. By disclaiming an interest in the business, you may be able to position stock ownership to your family’s benefit.

4. Creditor protection. Any inheritance you receive would immediately be subject to creditors’ claims. It might be possible to avoid dire results by using a disclaimer to protect these assets. However, state laws and federal bankruptcy laws may defeat or hinder this goal. Consult with your estate planning advisor about your specific situation.

5. Charitable deductions. In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance, but using a disclaimer can provide a deduction because the assets will pass directly to the charity.   

Before you make a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, contact us for guidance.

© 2020 Covenant CPA

Whether you’re moving to another country for work-related reasons, retirement or simply want an opportunity to experience a new culture, it’s important to understand the potential tax and estate planning implications. If you don’t, you could be hit with some unpleasant surprises. Here are three possible pitfalls:

Double taxation. If you’re a citizen of the United States, U.S. taxes will apply even after you move to another country. So if your estate is large, you might be subject to gift and estate taxes in your new country and in the United States (possibly including state taxes if you maintain a residence in a U.S. state). You also could be subject to estate taxes abroad even if your estate isn’t large enough to be subject to U.S. estate taxes. In some cases, you can claim a credit against U.S. taxes for taxes you pay to another country, but these credits aren’t always available.

One option for avoiding U.S. taxes is to relinquish your U.S. citizenship. But this strategy raises a host of legal and tax issues of its own, including potential liability for a one-time “expatriation tax.”

Real estate issues. If you wish to purchase a home in a foreign country, you may discover that your ability to acquire property is restricted. Some countries, for example, prohibit foreigners from owning real estate that’s within a certain distance from the coast or even throughout the country. It may be possible to bypass these restrictions by using a corporation or trust to hold property, but this can create burdensome tax issues for U.S. citizens.

Unfamiliar inheritance rules. If you own real estate or other property in a foreign country, your heirs may run up against unusual inheritance rules. In some countries, for example, your children have priority over your spouse, regardless of the terms of your will.

Review before you relocate

If you’re considering a move overseas, discuss your plans with us before making a move. We can review your estate plan and finances and make recommendations to help avoid tax pitfalls after you relocate.

© 2020 Covenant CPA

If you’re in line to inherit property from a parent or other loved one, it’s critical to understand the basis consistency rules. Current tax law, passed in 2015, provides that the income tax basis of property received from a deceased person can’t exceed the property’s fair market value (FMV) as finally determined for estate tax purposes.

Prior law

Before the 2015 tax law change, estates and their beneficiaries had conflicting incentives when it came to the valuation of a deceased person’s property. Executors had an incentive to value property as low as possible to minimize estate taxes, while beneficiaries had an incentive to value property as high as possible to minimize capital gains, if they decided to sell the property.

Current law

The 2015 law requires consistency between a property’s basis reflected on an estate tax return and the basis used to calculate gain when it’s sold by the person who inherits it. It provides that the basis of property in the hands of a beneficiary may not exceed its value as finally determined for estate tax purposes.

Generally, a property’s value is finally determined when:

  • Its value is reported on a federal estate tax return and the IRS doesn’t challenge it before the limitations period expires,
  • The IRS determines its value and the executor doesn’t challenge it before the limitations period expires, or
  • Its value is determined according to a court order or agreement.

But the basis consistency rule isn’t a factor in all situations. The rule doesn’t apply to property unless its inclusion in the deceased’s estate increased the liability for estate taxes. So, for example, the rule doesn’t apply if the value of the deceased’s estate is less than his or her unused exemption amount.

Beware of failure-to-file penalties

Current law also requires estates to furnish information about the value of inherited property to the IRS and the person who inherits it. Estates that fail to comply with these reporting requirements are subject to failure-to-file penalties.

An accurate valuation is key

The basis consistency rules can be complex. The bottom line is that if you inherit property from a person whose estate is liable for estate tax, it’s important that the property’s value be accurately reported on the deceased’s estate tax return. Contact us with any questions.

© 2020 Covenant CPA

Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as homes, cars or stock — to specific people, you may inadvertently disinherit them.

Illustrating the problem

Let’s say Debbie has three children — Abbie, Mary Kate and Lizzie — and wishes to treat them equally in her estate plan. In her will, Debbie leaves a $500,000 mutual fund to Abbie and her home valued at $500,000 to Mary Kate. She also names Lizzie as beneficiary of a $500,000 life insurance policy.

When Debbie dies years later, the mutual fund balance has grown to $750,000. In addition, she had sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. But she neglected to revise her will. The result? Abbie receives the mutual fund, with a balance of $1.5 million, and Mary Kate and Lizzie are disinherited.

Even if Debbie continued to own the home, it could have declined in value after she drafted her will (rather than increased), leaving Mary Kate with less than her sisters.

Avoiding this outcome

It’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets. Debbie, for example, could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children.

If it’s important to you that specific assets go to specific heirs — for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to avoid undesired consequences. For example, your trust might provide for your assets to be divided equally but also provide for your children to receive specific assets at fair market value as part of their shares. If you have questions regarding the division of your assets to your heirs, contact us. We can review your plan and address your concerns. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

If you are about to receive an inheritance from a family member, you can use a qualified disclaimer to refuse the bequest. The assets will then bypass your estate and go directly to the next beneficiary in line. It’s as if the successor beneficiary, not you, had been named as the beneficiary in the first place.

But why would you ever look this proverbial gift horse in the mouth? For beneficiaries who already have large estates themselves, using a legally valid disclaimer can save gift and estate taxes, often while redirecting funds to where they ultimately would have gone anyway.

Estate planning benefits

Federal estate tax laws are fairly rigid, but a qualified disclaimer offers some unique flexibility to a forward-thinking beneficiary. Currently, the gift and estate tax exemption can shelter a generous $11.18 million in assets for 2018. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $22.36 million in 2018 to their heirs free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. Plus, the gift and estate tax exemption is currently scheduled to drop roughly by half in 2026.

By using a disclaimer, you avoid having the exemption further eroded by the inherited amount. Assuming you don’t need the money, shifting it to the younger generation without it ever touching your hands not only allows it to bypass your taxable estate, but saves gift and estate tax for the family as a whole.

5 legal requirements for qualified disclaimers

To be legally valid as a qualified disclaimer, the following five requirements must be met:

  1. The disclaimer must be made in writing and signed by the disclaiming party.
  2. The disclaimer must be irrevocable and unqualified.
  3. The disclaimant (that is, the person disclaiming) must not accept the interest or any of its benefits.
  4. The disclaimer must be delivered to the person or entity charged with the obligation of transferring the assets no more than nine months after the date the property was transferred or nine months after a disclaimant who is a minor reaches age 21.
  5. The interest must pass to a person other than the disclaimant without any direction by the disclaimant. Bear in mind that the spouse of the deceased is specifically authorized to be the person receiving the property by virtue of a disclaimer.

Look before you leap

Using a qualified disclaimer can provide flexibility if your net worth is already high and you’re in line for an inheritance from your parents or other loved ones. Before taking action, consult with us to help ensure a disclaimer is right for you and, if it is, that it meets the five legal requirements. Call us at 205-345-9898.

© 2018 Covenant CPA