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Disclaim or Release? Using the Transfer Tax Exemption

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As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), the real estate transfer tax exemption drastically increased from $5 million to $10 million. Indexing for post-2011 inflation brings these amounts to approximately $11.2 million for single, and $22.4 million per married couple. Consequently, disclaimers and releases are returning to the forefront of estate planning techniques.

Disclaimer

Under Section 2518, a disclaimer is a refusal to accept an interest in property. A properly executed disclaimer will remove the interest from the disclaimant’s estate without any tax consequences to the disclaimant (i.e., the disclaimant will not use any of his or her lifetime exemption in refusing the interest). Basically, the disclaimant is disregarded for estate, gift, and generation-skipping transfer tax (GST) purposes, and the interest is treated as having transferred directly from the donor to the successor named in the document. However, there are some administrative burdens to consider with this technique such as the disclaimer’s inability to direct where/who the disclaimed interest passes on to.

Releasing an Interest

All qualified disclaimers must satisfy a few formalities listed under Section 2518. If any of those requirements are not met, the disclaimer will be nonqualified, with tax consequences for the disclaimant. A nonqualified disclaimer is treated as a release of the interest.

A release is a relinquishment of an existing interest. A release is essentially the same as making a gift of the released interest to the remaindermen and will, therefore, have the burden of complying with the gifting rules (such as filing a gift tax return, depending on the value of the released interest). However, because of the increased federal lifetime exemption, using releases to remove interests in one’s estate may be ideal, especially for individuals who used much of their lifetime exemption prior to the TCJA. In states with their own estate tax but no gift tax, a release could remove interests from a client’s estate for state estate tax purposes with little tax consequences for the releasor.

Should I Utilize?

With the increased transfer tax exemption under the TCJA, disclaimers and releases can be great tools for estate planning purposes. However, it is important to assess in a case by case scenario which option is more beneficial to you and, due to federal and state requirements, if that option is even possible. Traps may be encountered when engaging in such planning, so it is important to be aware of your goals and how to make the laws and planning techniques work to your advantage.

For more details or questions regarding estate planning using transfer tax disclaimers and releases, please contact your Withum Tax Advisor or fill out the form below and we’ll respond to you shortly.

Hal R. Terr, CPA, PFS, CFP®, AEP®, Partner
(609) 520 1188
hterr@withum.com

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Ted Nappi, CPA/PFS, CSEP, Partner
(732) 842 3113
tnappi@withum.com

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