By Andy Ives, CFP®, AIF®
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A disclaimer is an interesting tool. It is a denial or disavowal of legal claim, or a formal refusal to accept an interest in something. “Release” and “waiver” are good synonyms. Oftentimes a disclaimer statement is used by a person looking to shield themselves from legal repercussions. A shady politician might disclaim any responsibility or liability from the things he “may or may not have said.” It would be nice if we could disclaim the bad things in life, like a stubbed toe or a failing grade in math class.
Disclaimers are not just for people looking to cover their tails. They can certainly be used for the benefit of others, especially with retirement plans. For example: a husband dies but neglects to name a beneficiary on his IRA account. The default rules in the IRA custodial agreement dictate the assets will flow equally to his surviving spouse and two adult children. What if the children do not need the money, but their mother does? The adult children can disclaim their portions of the estate, allowing 100% of the assets to go to their dear mother.
Disclaimers can also be used for planning purposes. In another example, an elderly widow names her only son as the primary beneficiary on her IRA. She also names his two children (her grandchildren) as the contingent beneficiaries. Upon her death, her son decides he would like the IRA assets to remain tax-deferred for as long as possible. He files a disclaimer and the IRA passes directly to the two grandchildren. As an additional benefit and as their father planned, his children can now stretch out the required minimum distribution payments over their own life expectancies.
By executing a “qualified disclaimer,” a beneficiary can avoid the estate, gift and generation-skipping transfer taxes that might be due. Income taxes can also be avoided (or minimized) if a person disclaims all or a portion of their interest in an inherited account. Be aware that qualified disclaimers are irrevocable and must meet a handful of rules. For example, they must be in writing, they generally must be received within 9 months of the date of death, and the person making the disclaimer cannot direct how the disclaimed assets are to be directed.
If an IRA owner dies but has not yet taken their required minimum distribution (RMD) for the year, that RMD must be taken by December 31 to avoid any penalties. Can the beneficiary disclaim the RMD? What if the original account owner dies late in December, has not yet taken their RMD, and there is not enough time to file the disclaimer before the RMD must be removed? Can the beneficiary disclaim AFTER taking the RMD death distribution?
The answers are Yes and Yes. A beneficiary can disclaim all interest in an account, even the death distribution. If there is time to file the qualified disclaimer before the death distribution needs to be paid out, the RMD will simply be paid to the next beneficiary in line. If time is tight and the RMD needs to be distributed immediately, a beneficiary is allowed to disclaim all or a portion of the account after taking the year of death RMD.
A disclaimer is a legal document and should only be done with the assistance of a knowledgeable advisor. Check to see if the financial institution where the account is being held will require you to use its own form, or will it accept a disclaimer drafted by outside counsel. Disclaimers should be filed with the custodian or, if you are looking to disclaim interest in a company retirement plan, with the plan administrator. Be careful not to get too involved with a retirement account if the ultimate goal is to disclaim – making investment decisions or exchanging your disclaimer for something else is considered “acceptance” and will eliminate the opportunity to disclaim.
Now if I could only figure out how to disclaim Mondays.