Using Qualified Disclaimers as a Hedge for Tax Uncertainty

Among the many concerns surrounding the estate, gift, and GST tax uncertainty, some people fear that Congress will enact retroactive legislation that could destroy estate planning actions taken in 2010. Joe Luby, an investment manager in Nevada, thinks that the simple solution is a qualified disclaimer. Mr. Luby’s example of how this works is below:

Tom Clark would like to gift $2 million of marketable securities to his son Bill. He establishes a trust naming Bill as primary beneficiary and his wife, Mary Clark as contingent. The trust is drafted to qualify as a completed gift for tax purposes, and Tom funds the trust with the $2 million securities portfolio. The family now has nine months (assuming Bill is age 21 or older) to decide if they want the gift to stand. Should Congress enact a retroactive increase in the gift tax, Bill will simply disclaim his interest in the trust, which then flows to Mary as contingent beneficiary. The entire transaction is gift tax-free if this option is triggered since the gift is now between spouses. And if the gift tax rate isn’t increased retroactively, the Clarks have locked in the lower gift tax rate by completing the transaction in 2010.

Joe Luby, Qualified Disclaimers in 2010, Trusts & Estates, Oct. 20, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.