PLAYING ‘POSSUM'

Lynn R. Siewert AIMC
Pension Consultant | Branch Manager
Advanced Corporate Planning, Vancouver, Washington

Here's a way to save taxes by simply "playing ‘possum." No, I don't mean that there's some tax benefit in wandering out at night into the middle of a well-traveled highway. Actually, I'm referring to the ‘possum's defense mechanism of "playing dead" in an attempt to fool predators. The use of a "qualified disclaimer" can be useful in keeping the predatory IRS from feasting on your family's wealth. A qualified disclaimer is a device that can be used in post-mortem estate planning. Although it does seem like an oxymoron, post-mortem estate planning is not only possible, it is often beneficial. Traditionally, a disclaimer was a device under state law that permitted the recipient of a gift, the heir to an estate, or the beneficiary of a trust to renounce his/her gift, inheritance or share of the trust. The state statute would provide a mechanism for individuals (called "disclaimants") to avoid receiving an unwanted benefit. Typically, the statutes provide that the person making the disclaimer is considered to have predeceased the transferor. The property disclaimed then goes to whomever would receive the property given the prior "death" of the disclaimant. Why in the world would anyone refuse a gift or bequest? Well, generally because they don't need it and the person who would receive the gift if they were dead does. For example, Fred and Wilma have three children. Fred and Wilma have all the money they will ever need. In fact, they have a whale of an estate tax problem. Two of their children live comfortable, though modest, middle class lifestyles. Their third child, Dino, is a highly successful entrepreneur who has accumulated a large estate of his own. Dino, who was single, dies in an offshore power boat race. Under state law, Fred and Wilma are to receive the estate. They elect to "play possum" and disclaim their interest knowing that Dino's estate will automatically be shared by their other two children. These are the requirements for a "qualified disclaimer" under federal tax rules:

1. it must be irrevocable and unqualified,
2. it must be in writing,
3. the writing must be received by the transferor or his/her legal representative,
4. this receipt must come no more than 9 months after the transfer is made (or, if later, 9 months after the disclaimant turns 21),
5. the disclaimer must be made before any benefits of the gift are accepted, and
6. 6) the interest must pass to another without any direction by the disclaimant.

The disclaimant may refuse all or a fractional interest in the items transferred. A disclaimer can be very useful in minimizing estate taxes at the death of the first spouse. For example, assume Harry and Wanda have a combined estate of $1.5 million and two children, Sam and Diane. Of this amount, $700,000 is owned by Harry individually. Harry had a simple, "I love you" will that left everything to Wanda upon his death in 2001. Wanda can use the disclaimer rules to renounce $675,000 of the assets left to her under the will. These assets will then go to Sam and Diane, thus saving about $270,000 in estate taxes at her death. Note, that a disclaimer generally cannot be used to renounce property received as a surviving joint owner. However, the disclaimed property may be transferred into a trust in which the disclaimant has an income interest as long as the disclaimant did not create the income interest.

Of course, this brief article is no substitute for a careful consideration of all the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.

Lynn Siewert is the Principal of Advanced Corporate Planning and Branch Manager of the Vancouver, Washington Office of Supervisory Jurisdiction, Licensed through First Allied Securities, Inc. Member NASD/SIPC