Question: I am the main beneficiary of a trust created by my mother and my 2 daughters (27 and 30 years old) are also beneficiaries. The balance of the trust will be distributed soon and my daughters want to give up any interest in it, so everything will be at my expense. My question is, what are the tax consequences of this arrangement? The total value of the trust is about $ 250,000. Thank you.

Answer: Dear L: You are correct in thinking that there may be some adverse tax consequences if your daughters give up their share of the trust. Although it is not clear from your question, I assume that your daughters acquired a 1/3 interest in their mother’s trust after their mother’s death.

Generally speaking, when a person is designated as the beneficiary of an interest in a property by virtue of a will or living trust, the interest is granted immediately after the death of the transferor, unless there is some other intermediate condition that must be satisfied. The same is true for interest awarded to designated beneficiaries under retirement plans (including IRA and 401 (k) plans), annuity contracts, and life insurance policies.

However, there are times when a designated beneficiary does not want the interest to be given to them, as is the case with their daughters. People in this situation often think they can just turn down the interest and that’s the end of the story. They feel that way because, in their minds, they have not actually received anything and therefore do not actually possess it.

Unfortunately, the tax laws say otherwise. Once the interest is awarded to a designated beneficiary, the designated beneficiary is considered to be the owner. Thereafter, any denial or waiver of interest by the designated beneficiary constitutes a gift of the present value of that interest for federal gift tax purposes. The donation is considered to be made to the contingent beneficiary or beneficiaries designated by virtue of the governing instrument; that is, the will, the confidence, etc.

If that’s the case, how could someone reject an inheritance without incurring gift tax? The short answer is that, for many years, he couldn’t. If there was any consolation in the way the tax laws were written, it lay in the fact that the resulting transfer could be offset to the exclusion of the annual gift tax. Any excess over the annual gift tax exclusion could be protected from an actual out-of-pocket payment through the unified gift and inheritance tax credit. Still, it was a hassle because you had to file a gift tax return and lost all or part of your consolidated credit against future gift and inheritance taxes.

To correct this problem, Congress amended the tax laws to establish a qualified liability exemption as part of the Tax Reform Act of 1976. A “qualified liability exemption” allowed a person to reject an interest in property without to be considered to have made a gift. of interest. In that case, the person was treated as if they had never received it, so there was no need to file a gift tax return, use a portion of their consolidated credit, or even pay gift tax. pocket-size.

Still, to take advantage of the qualified disclaimer provisions, you must meet the following requirements:

(1) The disclaimer must be in writing.

(2) The disclaimer must be delivered to the personal representative of the decedent’s estate or to the trustee of the decedent’s trust, or to any other person who has legal title to the property to which the interest relates, no later than 9 months after the last of: –

(A) the day the transfer that creates the interest in said person is made, or

(B) the day said person turns 21,

(3) The person making the disclaimer must not have accepted the interest or any of its benefits.

(4) And, as a result of such a disclaimer, the interest must pass without any direction from the person making the disclaimer, and passes:

(A) to the spouse of the deceased, or

(B) to a person other than the person making the disclaimer.

So, Ms. L, the good news is that your daughters can deny their interest in their mother’s trust without the transfer being a gift to you. However, they must meet the requirements set forth above, including the requirement that the liability waiver be made within nine (9) months after the transfer to their daughters. I assume it is nine (9) months after the death of your mother, but there may be other conditions in the trust instrument that actually delay the acquisition of your daughters’ interests. For this reason, I suggest you consult with an experienced estate planning attorney because these requirements are relentless. Once the nine (9) month period has expired, you will simply be out of luck.

Leave a Reply

Your email address will not be published. Required fields are marked *