Losing your spouse is one of the most difficult things you might face in life. Although it is important to take time to grieve, there are also some crucial steps you need to take as soon as possible to address your spouse’s accounts and property, save taxes, and secure your own future.
If your spouse’s will or trust, or your joint trust, has a disclaimer provision, one of the time-sensitive decisions you will need to make is whether to disclaim (refuse to accept) money or property that you will otherwise receive as a trust beneficiary. State and federal law set forth the requirements that you must meet in order for the disclaimer to work as intended. Under Internal Revenue Code (I.R.C.) § 2518, a qualified disclaimer is simply an irrevocable, unqualified refusal to accept a gift or bequest of a property interest. The disclaimer allows the interest in property to pass to someone other than the beneficiary who originally would have received it, and it is not considered a taxable gift from the first beneficiary to the next beneficiary in line. There is a special exemption under I.R.C. § 2518(b)(4) that allows a surviving spouse to benefit from disclaimed money or property, but taking advantage of the exemption requires careful planning.
A qualified disclaimer must meet the following requirements:
- It must be made in writing as required by state law.
- It must be made within nine months after your spouse’s date of death.
- You must not accept the property interest or its benefits.
- The interest must pass to someone other than you without any direction by you (the person who is disclaiming the interest).
There are several steps you should take to ensure that you make timely decisions and properly disclaim a property interest if you choose to do so:
Step 1: Locate the Estate Planning Documents. Your estate planning documents are one of the first sources of direction about what should happen next. Your spouse’s documents contain the roadmap that indicate what your spouse wanted to happen to their property and money, and they were likely designed in coordination with your own estate plan. A will or trust may include a provision specifying how particular property should be handled if the original beneficiary disclaims their interest in it. Your estate planning attorney will need to have those documents to advise you about the best course of action.
Step 2: Meet with your Estate Planning Attorney. The legal process when someone dies is often complicated, and it is important to seek the help of your estate planning attorney. Because of the limited time during which you must elect to disclaim accounts and property, you will need to make an appointment with your attorney as soon as you can. Your attorney will review your spouse’s estate plan with you and help you determine if it contains disclaimer provisions, and if so, whether you should consider disclaiming your interest in a will or trust and the effect of such a disclaimer.
Because of the unlimited marital deduction under federal tax law for US citizens, your spouse was permitted to transfer an unrestricted amount of accounts and property to you at any time during their life or at their death, free of taxes. However, the transferred amounts will usually be included in your estate. If you and your spouse have significant assets, using a disclaimer is one strategy for taking advantage of the lifetime estate tax exemption.
The current Minnesota estate tax exemption amount is $3 million. This means that if you die with an estate value exceeding $3 million, you will need to pay estate taxes. Aside from Minnesota estate taxes, some individuals also need to be concerned with federal estate taxes. Currently, the federal exemption amount is historically high. Now, in 2025, the federal estate tax exclusion amount is $13,990,000 for an individual and $27,980,000 for married couples, and only estates that exceed this amount are subject to federal estate tax. However, the current estate tax exclusion amount is scheduled to be reduced by half at the end of 2025, so many more estates will soon be subject to estate taxes unless the law is changed. In addition, several states (including Minnesota) have their own estate or inheritance taxes applicable to estates of a much lower value. Minnesota estate tax planning is particularly difficult because there is no portability of the Minnesota estate tax exemption. In other words, without proper planning, married spouses in Minnesota only have a combined state level estate exemption amount of $3,000,000. Therefore, if you reside in Minnesota or any other state which has a state-level estate tax, utilizing a disclaimer as part of your planning might save a significant amount of state-level estate taxes.
If your estate is likely to be subject to federal or state estate taxes, disclaiming an inheritance may make sense, especially if the beneficiary specified in the trust document as the next in line is less likely to be subject to estate taxes, or if the trust specifies that the disclaimed property can be transferred to another trust that will benefit you without being included in your estate.
Keep in mind, however, that for federal estate and gift taxes purposes, after your spouse’s death, you must file an estate tax return and make a portability election that will allow your deceased spouse’s unused exclusion amount (known as the deceased spousal unused exclusion (DSUE) amount) to be applied to your subsequent transfers during life or at death.
Your estate planning attorney will help you determine the best strategy to minimize your estate taxes or whether a disclaimer may be useful to achieve other goals, for example, to provide funds to a beneficiary that is next in line to receive the benefits of the trust and has a greater need for it than you.
Step 3: Include Financial and Tax Professionals in the Conversation. In addition to your attorney, involve your financial advisor, accountant, and other financial or tax professionals in the conversation. This team of professionals will help you determine the value of the accounts and property you will inherit from your spouse, as well as the value of your own estate, to determine if a portability election will provide adequate protection or if disclaiming some of the accounts and property in your spouse’s estate or held in trust for your benefit is the better strategy. They will help you consider all the important variables, including the impact of a disclaimer on your family members: Will they have to pay estate tax at your death if you do not disclaim your interest in the trust? Or will the beneficiary who receives the inheritance after a disclaimer be negatively impacted, for example, by increased income taxes if they receive trust income that pushes them into a higher tax bracket?
We Are Here to Help
Disclaiming your interest in a will or trust is a strategy that you may not have considered, but it may be a great way for you to achieve your estate planning and tax-savings goals. We can help you evaluate your unique circumstances to determine whether a disclaimer will benefit you and your loved ones, as well as assist you in meeting any looming deadlines and avoiding possible pitfalls. Give us a call today to set up a meeting.
