Make These Moves to Your Estate Plan Before the Election: Part II

In last week’s Retirement Watch Weekly, I presented Make These Moves to Your Estate Plan Before the Election. Let’s jump back in with one move that caught many of our readers by surprise:

Adult children who may choose to disclaim their inheritance.

Some who disclaim an IRA may not need the money now or are in a high tax bracket. In these cases, the IRA is inherited by the next-in-line beneficiaries, who are the grandchildren.

The grandchildren aren’t required to take distributions until 10 years after they reach age 18.

They also are likely to be in lower tax brackets than their parents or grandchildren.

So, it might make sense for both the surviving spouse and the children to disclaim inheriting all or part of the traditional IRA so it can be inherited by the grandchildren or trusts set up for their benefit.

That’s an example of how a disclaimer strategy can be used for one asset, a traditional IRA. The strategy can be used for all types of assets.

To make the disclaimer strategy work, you need to name a line of beneficiaries for each of your assets.

As in this example, the line typically would be your spouse, then your children, and next your grandchildren. But you can adapt that line for your situation and preferences.

It can be a good idea to name one or more charities as the ultimate beneficiary.

This ensures there’s a final beneficiary other than your estate and lets the family decide to give some of the estate to charity you liked if they want.

The same is true for life insurance and annuities.

The inheritance of these assets isn’t affected by what’s in your will or living trust.

Your will, revocable living trust and other estate planning documents should anticipate that an inheritance might be disclaimed.

The documents should state that the inheritance may be disclaimed and how the property should be distributed if it is disclaimed.

You name a primary beneficiary (your spouse in the example above) and then one or more contingent beneficiaries.

As noted, you can name several levels of contingent beneficiaries so anyone can disclaim and pass the asset to the next beneficiary without any additional estate, gift or income taxes.

You probably want to have one or more trusts drafted for the benefit of the grandchildren, in case it makes sense for assets to be disclaimed in their favor but they’re too young to manage the assets.

You’ll also probably want one trust that meets the unique conditions for being a qualified IRA beneficiary and another set up for non-IRA assets.

The big advantage of incorporating a disclaimer strategy is that it gives additional flexibility to your estate plan. The details of the plan aren’t locked in.

The plan can adapt to changing circumstances in your family, the markets and the tax law.

You don’t have to redraft the documents to adapt to each change.

Once you have the documents drafted to incorporate a disclaimer strategy, be sure your estate planner and at least the primary beneficiary know the plan.

After you pass away, they need to examine the details of the estate in light of current law and probable future law.

They also can look at the cash needs and tax brackets of the contingent beneficiaries.

The goals are to maximize the family’s after-tax wealth over several generations and distribute assets to beneficiaries when they need it at little or no additional tax cost.

Remember, no one must disclaim an inheritance under this plan.

It is an option to use when the surviving spouse’s needs are met and a disclaimer will transfer wealth to other family members faster and increase the family’s after-tax wealth.

With the disclaimer strategy, you aren’t required to have perfect foresight. Your plan is adjusted to the optimal distribution for your family at the time you pass away.

I’ll address even more important estate planning strategies in detail in later issues. Click here for Part One of Make These Moves to Your Estate Plan  Before the Election.

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