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When a client sadly passes away, financial advisors often leap into action. In part it’s simply to provide good service and support to a grieving family. In many cases, there’s also a business interest to engage with next generation heirs and establish or deepen a relationship, in the hopes of continuing to serve the family after the death of the original client. In either case, “proactivity” becomes the guiding principle of engagement. Except the reality is that when it comes to estate planning scenarios, there is actually such thing as being too proactive… because the actions of settling an estate and distributing assets can unwittingly negate the ability of beneficiaries to subsequently engage in disclaimer planning.

In this guest post, David Haughton, an attorney and VP of Engagement for Hargrove MSO, explores the benefits of disclaimer planning, and how the unique requirements for executing a qualified disclaimer, including and especially that the beneficiary not have “accepted” the inheritance, can run directly contrary to traditional proactive service for estate heirs.

The basic principle of executing a disclaimer is fairly straightforward: a beneficiary can choose to not accept an inheritance, and by doing so in a qualified manner, is simply deemed as never having inherited the asset in the first place, allowing it to flow instead to the next (i.e., contingent) beneficiary. For those facing estate tax exposure, this is much more appealing than simply receiving the inheritance and re-gifting it to another beneficiary (and using a portion of their own lifetime gift and estate tax exemption). And even for the wide swath of those without Federal estate tax exposure, disclaimer planning can still be relevant in scenarios from shifting a pre-tax IRA to someone with a more favorable tax rate to draw post-death Required Minimum Distributions, to shifting after-tax assets to someone who may receive better step-up in basis treatment in the future.

However, executing a qualified disclaimer has a series of four very concrete requirements: 1) made in writing; 2) completed within 9 months of the inheritance; 3) done before accepting the inheritance; and 4) results in property passing without direction by the disclaimant. The fourth requirement in particular is important to recognize, because it means the beneficiary cannot actually dictate where the property will go, only that they will not receive it… and the original governing documents (e.g., the Will, or trust, or account agreement, or beneficiary designation) instead determines who will receive instead.

The bigger caveat, though, is the 3^rd requirement of a qualified disclaimer: that the property not be accepted. Which is important, because distributing assets to a beneficiary, paying income to them, or even the advisor taking action to sell, liquidate, or otherwise manage the assets at the direction of the beneficiary, can be deemed acceptance. Such that while the standard rules for disclaimers allow up to 9 months for completion, acceptance will immediately end the time window, which means advisors proactively trying to engage next-generation heirs can unwittingly terminate the planning opportunity.

As a result, a best practice for helping heirs to settle an estate is to understand and identify as early as possible whether disclaimer planning might possibly be relevant, if only to avoid eliminating its potential altogether with “early” settlement of the estate. Fortunately, this doesn’t mean no actions can be taken in the account – the advisor can still manage at direction of a fiduciary (e.g., a trustee) supervising the assets. And often advisors have the best holistic perspective to understand whether a disclaimer is a relevant planning opportunity (or not).

Ultimately, the key point is simply to recognize that because “acceptance” can terminate the window for executing a qualified disclaimer, advisors otherwise engaging in proactive service to help a grieving family or to establish a relationship with next generation heirs must be cautious not to accidentally end a disclaimer planning opportunity. Especially recognizing that disclaimers aren’t just a matter of Federal estate tax planning (for only a small subset of ultra-high-net-worth clients with estate tax exposure); income tax consequences, from IRA distributions to step-up in basis opportunities, mean disclaimer planning has potential for a wide range of client circumstances. As long as the window remains open long enough to determine whether it’s right for any particular heir!

And if you want to go deeper on this topic, hear directly from the author on the Financial Advisor Technician podcast.

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