What is Disclaiming?

Most people believe that estate planning is something that is done while you are living. However, there are estate planning actions that can be taken after a person has died. This is known as post-death estate planning. Instead of the living testator making estate planning decisions, the steps are taken by the heirs after fully understand the assets being transferred and those assets impact on the heir’s own financial situation. One of the most common types of post-death estate planning tool is known as making a disclaimer or disclaiming.

Disclaiming is the refusal by a potential beneficiary to accept benefits given through a testamentary transfer of property. In most cases, a primary beneficiary will "disclaim" or refuse to accept the property, the property will then pass gift tax-free to the contingent beneficiary. As long as the correct steps are taking, the IRS does not interpret the disclaimant, i.e. the person making the disclaimer, as ever receiving the property. Therefore, no transfer is considered to have been made by the disclaimant for federal gift, estate, or generation-skipping transfer tax purposes.

As stated, there are several important steps that must be followed to ensure a disclaimant meets the standards of a "Qualified Disclaimer" under IRS Section 2518 . Those requirements include:

  1. The disclaimer must be irrevocable. No going back and getting control of the property.
  2. The disclaimer must be written and delivered to the current holder of the legal title. In most cases, the current holder of legal title will be the personal representative for the estate or trustee.
  3. The disclaimer must be made within 9 months of the date of death. A person under 18 can't make a disclaimer.
  4. The disclaimant must not have accepted any interest in the benefits of the asset being disclaimed.
  5. The property must pass to whoever it passes to without any direction, except for a surviving spouse on the part of the disclaimant. In other words, you can't disclaim and say "I want the property to go to Al." The property would go to whoever would inherit under intestacy rules or the contingent beneficiary.

The biggest pitfalls are numbers 4 and 5. For number 4, the term “interest in the benefits” is very loosely interpreted. For example, if two people own a bank account as joint tenants with right of survivorship and one of the owners dies, as sooner as the surviving owner uses assets in the bank account that surviving owner has been deemed to have accepted an interest in the benefits of that account. That can be issue for people that don’t realize how easily it can be to invalidate a disclaimer and, thus, creating some form of income or transfer tax liability.

As for number 5, most people assume they can direct the property to whomever they want since they are the technical "owner" of the property. As noted, that is not correct. The property would pass to the next person in succession. For example, if you have children and inherited a stock from a parent, you can't disclaim the stock and direct to your less than affluent sibling. The stock would go to your children. There are ways to accomplish transferring the stock to your sibling but disclaiming wouldn't be the correct process.

Now, the issue for most people is trying to understand why someone would want to disclaim. There are a number of reasons. Imagine the property is an underwater house that you stand to inherit; I don't think many people would take that asset. Or it is some other indebted asset. Someone else's debt is not something I would want voluntarily accept. Another example is that you are the primary beneficiary set to inherit a million dollar IRA but you don't need the money but maybe your children do. Oh, to have that problem.

Disclaiming might be the post-death estate planning step to take to correct the estate planning steps taken by the decedent.

Basics of Estate Planning: What is an Inventory in Probate?

Probate administration has numerous steps that need to be taken at specific times to ensure that the administration is done appropriately. Each step has various pitfalls that can occur slowing down the process. One of the bigger stumbling blocks during the administration of an estate is the creation of the probate estate's inventory.

An inventory is the document produced when the personal representative marshals the assets of the estate. Marshalling of the assets is the process of collecting and determining the value of all the assets the decedent owned at the decedent's death. Remember we are only talking about probate assets. Non-probate assets do not go through estate administration and would not be listed on an Inventory. See the February 2016 Newsletter for more on probate v. non-probate assets

The first step is to determine a value for all of the assets that a decedent owned at the decedent's death. That is not as easy as it may seem. Many assets value can be ascertained by the personal representative. Those assets have values that are publically available like using Kelly Blue Book for the decedent's automobile or the decedent's last bank statement or the value of a stock on the day the decedent died. But, other assets are harder to value. Additionally, the Courts have placed restrictions on who can determine the value of a particular asset. For tangible personal property, a personal property appraiser might be needed. If the decedent owned a small business at the decedent's death, a business valuation appraiser might be needed to ascertain the value of the business. These appraisals might not be cheap.

Once the assets values are determined, the personal representative creates the inventory. The inventory will divide the various assets into different classes depending on the asset type called schedules. Each schedule covers an asset class like real property, tangible property, corporate stocks, bank accounts, bonds, debts owed to the decedent and miscellaneous category. For example, if the decedent owned a home the home, along with the appraised value of the home, would be listed under the real property schedule of the inventory. The decedent's bank account and value would be listed in the bank account schedule. And so on.

After the inventory is created, the personal representative will mail the inventory to all of the interested persons. This allows the interested persons the chance to review the decedent's assets and understand what assets will be administered in probate. It also allows interested persons to correct the personal representative about any missing assets or assets that should not be included in the inventory. Depending on the state the personal representative might also have to file the inventory with the court for an audit review.

Creating an inventory can be a time consuming process for the personal representative. But, the inventory is the starting point for all the financial transactions that occur during probate administration. Those financial transactions will be listed in another document called the Account. I'll talk about the Account next time.

Estate of the Month: When Doves Cry Must Mean There is No Will - Prince's Big Estate Problem

Normally, when I put together my estate of the month article, it is usually a couple of months after the celebrity passed away. The delay occurs because it takes time for someone to petition the court to open probate administration for the celebrity. Once the petition is filed, the celebrity's estate and court documents can be reviewed by anyone with the desire to review the case file. And, with the death of a famous person, the tabloid press is always ready to take a look. However, in this month's estate of the month for Prince that is not the case.

Prince was born on June 7, 1958. He was a renowned singer, songwriter, multi-instrumentalist, record producer, and actor. He was rumored to be able to play 27 different instruments. Prince was found died on April 21st in his home in Paisley Park, Minnesota. Prince was not married and had no living children or parents but, in addition to his full sister, Prince was survived by 5 half-siblings. While the reports of his autopsy will not be released for a few more weeks, many suspect that Prince died of a drug overdose.

As I mentioned, I would normally wait to write an article on Prince because there would not be enough information. But, that all changed on Monday.

On April 26, 2016, Prince's sister and only full sibling Tyka Nelson filed court documents in Carver County, Minnesota, to open probate administration for the estate of Prince Rogers Nelson (Prince's real name). Included in his sister's petition was the shocking news that no will had been found and that Prince likely did not have one.

For a number of reasons, I was shocked when I read that news that Prince did not have a will. Prince was famous for protecting his rights with respect to his music from being used in unauthorized ways. He regularly had his representatives file "takedown" notices with YouTube to remove unauthorized uploads of his music and videos. He famously changed his name to unpronounceable "love symbol" during a contractual fight with Warner Bros. That sounds like a man that understands the nuances of the law and how they protect a person's rights. Second, there are unsubstantiated rumors that Prince was diagnosed with AIDS 6 months ago and that he had been "preparing to die for awhile." To me, if you know your time is near drafting will would be close to the top of my list of things to do.

There is a possibility that Prince did determine what he wanted to do with his estate in the event of his death and his sister is just no aware of any documents. He could have established a trust, which would not need to be filed with the court. Just because Nelson believes there is no will, doesn't mean there's no trust out there. It was also less than 5 days after his passing that Nelson filed the petition to probate the Prince's estate. A will could be somewhere out there. Further, he could have established a trust, which would not need to be filed with the court.

If no will or trust is found then Prince's estate will be a nightmare to administer. Just figuring out who controls the rights to which recordings is one thing: Warner Music Group co-owns rights to unreleased music in Prince's vault recorded between 1978 and 1996; any release requires permission from both Warner and the singer's estate. But there is also the complicated task of sorting out matters related to any collaborators who wrote or recorded with Prince in the studio. There will also have to be an inventory of all the other assets Prince owned at his death. I suspect he had a plethora of tangible assets and had real property located outside of Minnesota.

As for who gets a share of Prince's estate that is estimated to be worth upwards of $300 million, if no will or trust is found. Well, his estate will likely stay all in the family under intestacy rules. Under Minnesota intestacy law, half-siblings are treated the same as full siblings. Maryland and D.C. have similar provisions for intestate estate when half-siblings are considered for inheritance. However, in Virginia, a half-sibling would only be entitled to half of what a full sibling would receive under Virginia intestate distribution law. Good thing for Prince's half-siblings Prince did not live in Virginia and I guess a bad thing for Tyka Nelson he did not. If he didn't want his full-sister or any of his half-siblings to share in his estate, only by drafting a will or trust would he be able to avoid intestacy.

What is the big take away from Prince's death even if you are not worth $300 million...draft a will.

At the end of the day, I suspect that Prince did avail himself of estate planning but we just do not know. But, I will be sure to update you when that happens.

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