Estate Tax in 2013

1. What is the Estate Tax limit in 2013?

The applicable exclusion amount in 2013 is $5M plus inflation.

2. What does this mean?

If an estate is valued at less than or equal to $5M, the Estate Tax will not be applied to the decedent's estate. However, if the decedent's estate exceeds $5M, then the Estate Tax will apply albeit only in regards to the portion above $5M.

For example, Danny Decedent died on New Year's day 2013 in a tragic hot air balloon accident. Danny's entire estate consisted of a $6M bank account because of his miserly ways. Since Danny's estate exceeded the applicable exclusion amount in 2013, $5M, the Estate Tax would apply to the excess, namely $1M. However, if Danny's estate was worth $4.5M, no Estate Tax liability would arise because it does not exceed the applicable exclusion amount.

3. What was the Estate Tax limit in 2012?

The Estate Tax limit in 2012 was $5.12M

4. Which year applies to a decedent's estate?

The applicable year is the year in which person passes away. The chart below summarizes the following years' Estate Tax regime. Consequently, if a person died in 2002, the $1M exclusion amount would apply or if a person died in 2007, the $2M exclusion amount would apply. 

Of note, it does not matter when a person writes their will or trust. I have been asked this question numerous times. Some people are under the impression that the year in which the decedent wrote their testamentary document controls. This is simply not true. I give them credit for creative thinking though. A trust written in 1985 by a 2005 decedent results in the application of the 2005 Estate Tax law, not the 1985 Estate Tax law.

As you can see by the below chart, the applicable exclusion amount has increased tremendously recently. In particular, the rise in the applicable exclusion amount easily outstrips inflation over this time. 

Year                   Amount Excluded         Maximum Tax Rate

2001                   $675,000                      55%

2002                   $1M                             50%

2003                   $1M                             49%

2004                   $1M                             48%

2005                   $1M                             47%

2006                   $2M                             46%

2007                   $2M                             45%

2008                   $2M                             45%

2009                   $3.5M                          45%

2010                   Repealed                      0%

2011                   $5M                             35%

2012                   $5.12M                        35%

2013                   $5.25M                        40% 

5. What is included in a decedent's estate?

Any personal, real or intangible property the decedent owned wherever located. In other words, everything you own basically. IRC §2031(a). There are other categories of items included in a gross estate but are too technical to explain succinctly.
 
6. What is not included in a decedent's estate?

Real property earmarked for a qualified conservation easement.  IRC §2031(c).

7. When is the Estate Tax due?

The Estate Tax return must be filed 9 months after the decedent's death unless an extension is granted. IRC §6075(a). The form used is IRS Form 706.

8. Can I get an extension?

Yes, a 6-month extension is automatically granted upon request. Treas Reg §20.6081-1(b). However, this does not extend the time to pay the tax. Generally speaking, the Estate Tax must be paid when the return is filed. IRC §6151(a). 

9. What is the Estate Tax's top rate?

The maximum rate in 2013 is 40%. 

10. Will California have an Estate Tax in 2013?

No, legislation recently passed by Congress to avoid the "fiscal cliff" eliminated the state Estate Tax credit. Therefore, there will be no California Estate Tax in 2013. 

Marital Deduction - Estate Tax

One of the key terms used when discussing the estate tax is the "marital deduction." The Internal Revenue Code provides an enormous deduction for transfers to  the surviving spouse from the deceased spouse. This post will provide a brief overview of the marital deduction.

The estate tax is applicable to all U.S. citizens and permanent residents when they die. Still, the estate tax is levied upon only certain estates that exceed a monetary threshold. The threshold figure for 2012 is $5.12M. This means that if a person's estate is valued over $5.12M, an estate tax of 35% will be levied upon the amount over $5.12M. For example, if a person's estate is worth $6M, a tax would levied upon 880,000. If a person's estate is under the threshold, there is no estate tax.

The value of a person's estate is basically the computation of all assets the person owns worldwide. Hence, if a person is a U.S. citizen but owns property abroad, e.g. a London flat, this flat would count towards the estate tax calculation. However, deductions from the value of the person's estate are permissible and therein the marital deduction comes into play.

A deceased spouse may transfer to a surviving spouse an unlimited amount of assets so as to reduce the value of their estate for estate tax purposes. IRC §2056(a). Although in practice the size of the transfer is typically carefully calculated to avoid future problems. For instance, if an affluent husband transfers his entire estate worth tens of millions of dollars to his surviving wife, the wife will probably have an estate tax issue down the line. This is due to the fact that the wife, assuming she does not re-marry, will not have the marital deduction at her disposal when she passes away. The upshot is that if a wealthy spouse blindly leaves everything to the surviving spouse, the estate tax issue is not really addressed but delayed. 

The common arrangement when dealing with marital deduction is to utilize the estate tax exemption of the deceased spouse by sheltering or disclaiming said amount and leaving the remainder to the surviving spouse. This sounds perplexing at first blush but is not conceptually difficult.  Assume John Doe has an estate worth $8.12M. He marries Jane Doe in 2012 in a May-December wedding. Jane is a U.S. citizen. Prior to John's passing, the couple write a marital deduction trust. The trust says that upon John's death, the trustee shall allocate to the marital deduction trust the maximum amount allowed to pass tax-free under the estate tax, i.e. the applicable exclusion amount. The remainder shall be allocated to Jane's trust. When Jane passes away, both trusts are to be distributed to John's neighbor Wilbur Wright. When John passes away in 2012, the trustee allocates $5.12M to the marital deduction trust and $3M to Jane's trust. Shortly thereafter in 2012, Jane passes away. Since Jane's estate is less than the estate tax threshold, $3M is less than $5.12M, and John's estate is held by a marital deduction trust, the estate of $8.12M passes to Wilbur estate tax-free. In short, since the couple wrote a marital deduction trust, the couple was able to utilize the unique advantages couples have in regards to the estate tax. That is, the couple was able to shield millions of dollars in assets from the estate tax due to drafting a marital deduction trust.     

There are caveats for utilizing a marital deduction trust however. The primary concern is that the recipient spouse must be a U.S. citizen. Conversely, there is no requirement that the deceased spouse be a U.S. citizen or a resident. 

Another key caveat is that marital deduction is not available to same-sex couples or domestic partners. While the Internal Revenue Code defers to state law for the definition of a spouse, the Defense of Marriage Act ("DOMA") prohibits the IRS from relying on a state law definition of spouse when the state law treats a same-sex couple or domestic partners as spouses. 1 USC §7. Although various courts have invalidated DOMA on constitutional grounds. Furthermore, here in California, the 9th Circuit affirmed a district court ruling that struck down Prop 8, the California constitutional amendment to ban same-sex marriage that passed in 2008. Going forward, the Prop 8 case, along with other DOMA cases, makes the future of DOMA uncertain.  

Living Trusts Taxation

The following is an excerpt from a recent California Court of Appeal decision:

"Before Beckwith presented the will to MacGinnis, he called Dahl to tell her about the will and e-mailed her a copy. Later that night, Dahl responded to Beckwith's e-mail stating: `"I really think we should look into a Trust for [MacGinnis ]. There are far less regulations and it does not go through probate. The house and all property would be in our names and if something should happen to [MacGinnis] we could make decisions without it going to probate and the taxes are less on a trust rather than the normal inheritance tax."

Beckwith v. Dahl (2012) ___ CA4th ___

The phrase in italics is a common fallacy held by many people. A revocable trust is a tax neutral document, i.e. it will neither increase nor decrease taxes.  Dahl was acting under this erroneous belief when she emailed Beckwith above. Regardless if the decedent wrote a will or revocable trust, the taxation of their estate would be unaffected by the drafting of either instrument. The principal reason for this is because reducing or eliminating the estate tax, "inheritance tax" is a colloquialism, is determined by the recipient of the property, e.g. a spouse or a charity, as opposed to what instrument is used.

However, it should be noted that other types of trusts are created to avoid or reduce taxes. For example, a disclaimer, A/B and charitable trusts are all examples of trust specifically designed for such. Still, each of these trusts utilize beneficiaries that are considered allowable deductions for estate tax purposes. For example, if a person passes away with a $100M estate, they can devise it entirely to charity and their estate will not have any estate tax liability.

Writing a Will

The following are some common reasons why a person decides to write a will and/or trust.

Avoid probate

This is probably the most common reason why a person writes a trust. Probate is the court-supervised transfer of assets from a decedent to a beneficiary or beneficiaries. The three main components are (1) the collection of the decedent's assets, (2) the satisfaction of the decedent's debts and (3) the distribution of the remaining assets to the beneficiary or beneficiaries. For example, if the decedent was a resident of Alturas, CA, their estate would be probated, if applicable, in the Modoc County courthouse as shown above. 

Of note, a will does not avoid probate as all wills are ultimately probated. Although, if the estate is not large enough, the will does not go through the formal probate process. Instead the will is merely lodged with the probate court. Prob C § 8200. This is the case when a person writes a "pourover will" in which the person's trust essentially owns almost the entire estate whereby no formal probate is needed. I have done this a few times for deceased clients. 

The two main reasons why a person would want to avoid probate is simply time and money. First, probate takes a minimum of approximately 6 months to complete, though the normal completion time is 9-12 months. The added completion time is dependent upon the court's docket. The less-clogged the probate calendar, the faster probate can be completed. Second, probate fees are particularly high. The fee is determined by taking a percentage from the estate's value. The fee is progressive such that the higher the estate's value, the larger the probate fee for the personal representative and attorney.  The personal representative is always free to waive compensation, though the attorney is probably not as likely to do so. 

Avoid estate taxes

The most commonly read post on my blog is the one devoted to the estate tax. Since I wrote the article on December 27, 2010, it has been uniquely viewed 11,966 times according to Google Analytics. The average time on the page for a visitor is 3 minutes 53 seconds.  For whatever reason, many people believe that the tax man, also known as the IRS, will come knocking on their door once the grim reaper has blown through. This is largely fantasy thinking. The estate tax affects a few small number of individuals. For example, the estate tax threshold in 2012 is $5,120,000. This means that if your estate is under that amount, your estate will owe no federal estate taxes. In case you were wondering, California does not have an estate tax for 2012. Individuals with estates that large are few and far between. Still, I am aware that the estate tax limit is set to revert back to the $1M threshold for 2013 if no legislative action is taken. In which case, thousands of individuals would be affected that were previously exempt from the estate tax. Regardless, millions of people will remain unaffected by the estate tax if it is lowered to a $1M threshold. 

Nonetheless, various trusts can be set up to avoid or delay the application of the estate tax. For instance, an A/B trust, Disclaimer trust, charitable remainder trust and a QDOT trust are all examples of trusts specifically designed to accomplish such.

Provide for the smooth transition of assets from decedent to beneficiary

If a person writes a will and/or trust they are removing the legal system's distribution scheme from the equation, known as intestate succession. In California, the probate code specifically spells out how assets are distributed to heirs. For example, if a single person passes away who does not have children or grandchildren, their assets would be distributed to their parent(s), and if no parent is living, then the assets would be distributed to their brothers and sisters. If you ever want to see what the breakdown is for your heirs, just look at a table of consanguinity (Google it). A common problem that arises when distribution is left to intestate succession is the fact that the personal representative must track down the heirs, wherever they may be. Another problem with intestate succession is that only your relatives can inherit your estate, friends are not included. Thus, if a person was estranged from their family but had a number of close friends, upon that person's death his estate would be distributed to his family unless he wrote a will, trust or designated beneficiaries through non-probate means. Moreover, a surviving boyfriend or girlfriend would not be entitled to anything under the laws of intestate succession. 

An additional benefit for writing a will and/or trust is the fact that a person can stipulate the terms of the inheritance. A few clients have expressed a concern that their children were not as responsible as they desired. The fear was that the child would inherit the money and immediately engage in frivolous spending given their spendthrift mentality. For example, a guardianship of the estate for a minor automatically terminates at age 18, the age of majority in California. Prob C § 1600(a). Thus, the spendthrift child's inheritance, if in a guardianship, would have no spending limitations placed on it post-18. The child would then be free to spend as they see fit.  In light of this, a trust established for a child's benefit can specify its purpose. Many trusts often state that the trust will be used for health, education, maintenance and support. The key is that the trustee, rather than the child, will ultimately make the determination as to trust distributions and allocations. Yes, this scenario does create a "trust fund baby" situation, although I would prefer that to a situation where the child spends the money on frivolous items. 

Probate Terms

Probate law has certain terms that have specific legal meanings to them. The following are some of those terms.

Abatement 

Definition: The reduction of testamentary gifts. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent decides to leave $50,000 in his will to his friend Larry Appleton with the balance, known as the residuary, to his other friend Homer Thompson. When John wrote his will, his estate was worth $500,000 in liquid assets. However, when John passed away, due to his profligate spending, his estate was only worth $30,000. California laws on abatement say that Larry is entitled to the remaining $30,000, not Homer. Prob C § 214029(a). However, the default rules of abatement can be altered in a will. Prob C § 21400. 

Ademption 

Definition:  Property that was listed in the person's will that is not in his or her estate at the time of their death. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent states in his will that his friend James Rodgers is to receive his prized red Ferrari 308 GTS, which was featured in the movie National Lampoon's Vacation. (I have watched that movie about a thousand times now). John then sells his Ferrari to pay off his credit debt and passes away in a tragic hot air balloon accident shortly thereafter. John's gift of the Ferrari to James is therefore adeemed. James will then need to prove, in order to inherit replacement property from John's estate, that there is no sufficient proof to conclude that John intended for the gift to fail. Estate of Austin (1980) 113 CA3d 167. For example, James will argue that John sold the car because he intended to pay off his credit card rather than avoid having James inherit his Ferrari.

Beneficiary

Definition: "A person to whom a donative transfer of property is made or that person's successor in interest." Prob C § 24.

Example: John Negligent leaves, in trust, a beach home in Santa Cruz for his nephew Bobby Smithson.

Class gift

Definition: A gift to all individuals matching the description of the class. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent writes a will and leaves his entire estate to his "nieces." When John write his will, he has 4 nieces but at the time of his death he has only 1 niece. Since the devise was to a class of members, rather than individuals, the remaining niece is entitled to inherit the entire estate rather than split the estate with the heirs of the predeceased nieces.

In contrast, a gift made by Katherine Moore in her will to "Carrie D. Griffin and her sister, Anna M. Davis, equally divided" was found not be a class gift.  Estate of Moore (1955) 135 CA2d 122. Thus, Anna could not inherit the entire gift even though Carrie had predeceased Katherine.

Creditor

Definition: "One to whom a debt is owed." Black's Law Dictionary 8th ed. (West Group, 2004)

Example: John Negligent runs over a defenseless old lady in the Santa Cruz mountains on a dark and stormy night. The old lady's family sues sues John for wrongful death and wins. While on appeal, John passes away due to an unforeseen traffic accident. The victim's family is a creditor of John's estate and may assert a creditor's claims during John's probate.

Decedent

Definition: "A dead person." Black's Law Dictionary 8th ed. (West Group, 2004)

Example: Self-explanatory. I will avoid making a potshot at a recently deceased celebrity.

Disclaimer

Definition: "Any writing which declines, refuses, renounces, or disclaims any interest that would otherwise be taken by a beneficiary." Prob C § 265

Example: Homer Thompson is the first named beneficiary of John Negligent's large estate, his uncle. However, Homer has enormous credit card debt and multiple judgments against him. Rather than have his creditors inherit his uncle's estate, Homer disclaims his interest in John's estate so that it transfers to the second named beneficiary. For reference, this is legal. Prob C § 283.

Executor

Definition: An individual nominated in a will to be appointed by the probate court to administer the estate of the decedent's death. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent nominates in his will that Freddy Freebird to be the executor of his will. 

Fiduciary

Definition: A person who is required to act for the benefit of another person, on all matters within the scope of their relationship; one who owes to another the duties of good faith, confidence and candor. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: An executor hires an attorney to handle a decedent's probate. The executor is a fiduciary for the decedent's estate and the attorney is a fiduciary for the executor.

Heir

Definition: Any person, including the surviving spouse, who is entitled to take property of the decedent by intestate succession under this code. Prob C § 44. 

Example: Harry is married to Wendy but the couple decides never to have kids. Harry passes away in a tragic rafting accident on the Colorado River in Arizona. At the time of his passing, Harry did not write his will. Wendy is considered Harry's heir. 

An heir is basically a person's next of kin.

Intestate

Definition: A person who has died without a valid will. Black's Law Dictionary 8th ed. (West Group, 2004). 

Example: Irwin decides to write a will but can only locate 1 witness, his neighbor, to sign his type-written will. On the way home from having his will countersigned by his neighbor, Irwin is run over by a pizza delivery guy. Irwin has died intestate because a type-written will requires 2 witnesses. Prob C §6110.

Issue

Definition: All his or her lineal descendants of all generations, with the relationship of parent and child at each generation being determined by the definitions of child and parent. Prob C § 50.

Example: Harry and Wendy, a married couple, have two children, Sonny and Denise. Denise then gets married and has a child, Gwynn. Harry then passes away in an unforeseen blender accident. Harry's issue would be considered Sonny, Denise and Gwynn. 

Lapse

Definition: A devise to a beneficiary that fails because the beneficiary has either predeceased the testator or has failed to live until a certain point in time. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Thomas devises to Bobby his home in Los Altos, CA free and clear, 650 Rosewood Court. Bobby unexpectedly passes away before Thomas succumbs to mortality. Bobby's inheritance is a nullity because he has failed to survive Thomas, namely the gift has "lapsed." 

Minor

Definition: An individual under 18 years of age. Fam C §6500.

Example: Self-explanatory   

No Contest Clause

Definition: A clause in a will or trust that disinherits a beneficiary should they contest a will or trust. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Thomas writes in his will that his son, his sole heir, shall only receive $10,000 of Thomas' $1,000,000 estate. The remainder of the estate will go to Thomas' drinking buddy Barney. The will also contains a no contest clause which states that Thomas will forfeit his $10,000 inheritance if he chooses to pursue litigation in hopes of overturning the will for whatever reason.

Pretermitted Child

Definition: A will, made by a parent, that fails to account for a child.  Black's Law Dictionary 8th ed. (West Group, 2004).  

Example: Harry writes his will in 2000. In 2002, Harry marries Wendy and they have a child named Doris in 2004. In 2011, Harry passes away after toppling a vending machine after he tried to grab the last Diet Mountain Dew from it. Doris is a pretermitted child because Harry's will does not account for her. In light of this, Doris may be able to claim an intestate share of Harry's estate.

The companion to a pretermitted child case is the pretermitted spouse, in which the husband fails to account for the wife in his will.

Residuary

Definition: A residuary gift is a transfer of property that remains after all specific and general gifts have been satisfied. Prob C §21117(f).

Example: Thomas pens a will with the following stipulations (1) $15,000 to my Uncle Buck (2) $20,000 to my neighbor Al Bundy (3) my Honda Accord to my friend Larry Appleton and (4) the residual to Pancho Villa. When he dies Thomas' estate has (1) $100,000 in cash (2) $300,000 in Exxon Mobil stock (3) a home in Beverly Hills, CA (4) a Honda Accord and (5) a Rolex Oyster Perpetual. 

Villa, as the residual beneficiary is entitled to $65,000 in cash, all the Exxon Mobil stock, Thomas' house and his watch. 

Rule Against Perpetuities 

Definition: A nonvested property interest is invalid unless one of the following conditions is satisfied: 

(a) When the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive or (b) The interest either vests or terminates within 90 years after its creation. 

Example: William Randolph Hearst, the media baron, wrote in his 1951 will that his trustee was to operate his business, which is estimated to be worth billions of dollars, as long as they see fit and without time limit. Due to the rule against perpetuties, the trust is expected to last until 2040. Hearst v Ganzi (2006) 145 CA4th 1195. The reason for this is because by 2040, the trust will have failed to vest or terminate within 21 years of Hearst' death and it will be 90 years since the trust's creation.

Testator
 
Definition: A person who has made a will.Black's Law Dictionary 8th ed. (West Group, 2004).
     
Example: Pretty sure an explanation is not needed here.

Trustee

Definition: One who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary. Black's Law Dictionary 8th ed. (West Group, 2004). 

Example: Thomas writes a trust and leaves property to his son Samuel. However, since Samuel is a minor, Thomas entrusts the property to Theo to hold in trust until Samuel becomes an adult.

The list of duties a trustee owes a beneficiary are expansive and there is significant liability involved with this undertaking.

Trustor (or Settlor)

Definition: One who creates a trust. Black's Law Dictionary 8th ed. (West Group, 2004). 

Example: Every trust has three components, a trustor (or settlor), the person who creates the trust, the trustee, the legal owner of trust property and the beneficiary, the equitable owner of the property.

Disclaimer Trust

The following are some questions that relate to a disclaimer trust.

1. What is a disclaimer?

A disclaimer is basically a refusal to accept an interest in property via inheritance.

2. What is a disclaimer trust?

A disclaimer trust is a type of trust where a disclaimant, often the surviving spouse, disclaims property from the deceased person’s estate, whereby the disclaimed property is transferred to a disclaimer trust.

3. Why would I use a disclaimer trust?

Disclaimer trusts are used by couples to take advantage of the marital deduction formula that cushions the blow of the estate tax.

4. How does a disclaimer trust work?

First, the surviving spouse will disclaim a certain amount of property from the deceased spouse’ estate which will be held in the disclaimer trust. Then, the surviving spouse may make distributions to themselves from the disclaimer trust "if the power is subject to an ascertainable standard." Treas Reg §25.2518-2(e)(1). This ascertainable standard is generally thought to be limited to health, maintenance, or support. Treas Reg §25.2518-2(e)(5), Example 12. The disclaimer trust will most importantly not be considered an asset of the surviving spouse’s estate for estate tax purposes but instead the deceased spouse’s estate.

The following example should offer guidance:

Harry and Wendy, a mature married couple, resided in lovely Campbell, California. Harry and Wendy had two children, Sampson and Donna. Harry passed away in 2011 in a tragic hot air balloon accident. At such time, the marital estate was worth $7M. Prior to Harry’s passing, the couple executed a marital trust in which the survivor would inherit the decedent’s entire estate subject to a disclaimer trust.

The sole assets of Harry and Wendy were a home worth $5M and $2M in Google stock. Since Wendy was a frugal person, she believed that she would be unable to exhaust the entire marital estate, namely $7M, before she passed away. Of note, if Wendy did pass away in 2011 or 2012 and her estate was greater than $5M, her estate would be subject to the estate tax. 

Wendy decided to disclaim her entire interest in the Google stock, specifically $2M, through the medium of a disclaimer trust in order to avoid the potential implication of the estate tax. The result of Wendy’s disclaimer would create 2 trusts, a survivor’s trust for Wendy and a disclaimer trust for Wendy as well. Wendy could use the survivor’s trust for any purpose she wanted whereas the disclaimer trust could be used for matters involving an “ascertainable standard” as mentioned earlier. For instance, if Wendy was in need of a hip replacement surgery, she could distribute a portion of the disclaimer trust, namely Google stock dividends, to herself to pay for the surgery because it was a medical expense.

Furthermore, Wendy’s disclaimer would appreciably benefit her children, Sampson and Donna, because the assets of a disclaimer trust would not be included in her estate for estate tax purposes. Thus, even though Wendy’s two trusts might total over $5M, the estate tax exemption amount for 2011 and 2012, her estate would not subject to the estate tax. The reason for this is because the disclaimer trust would be considered part of Harry’s estate and the survivor’s trust would be part of Wendy’s estate. Therefore, Wendy’s children would reap a significant tax savings thanks to Harry and Wendy’s prudent planning.

5. Is a disclaimer trust an irrevocable trust?

Yes, a disclaimer trust is an irrevocable trust.

6. Can I make an oral disclaimer?

No, federal and California law requires that a disclaimer be in writing. IRC §2518(b)(2); Prob C §§265, 278.

7. Is a disclaimer trust comparable to an A/B trust?

Yes, a disclaimer trust is a document that seeks the same goal as an A/B trust, avoidance of the estate tax to the fullest extent possible through a marital deduction formula.

8. What type of people use disclaimer trusts?

The disclaimer trust is designed for people with an estate where the estate tax might be an issue. An A/B trust is geared towards couples where the estate tax will be an issue.

Unfortunately, nobody knows the estate tax’s long-term future given that the current law is set to expire in 2013.

9. How do you value assets that might or might not be disclaimed?

The value of the asset is the fair market value of the property on the date of death. IRC §2031(a). For example, if James purchased a home for $300,000 in 1985 and died in 2011 when the home was valued at $500,000, the value of the asset would be $500,000.

10. What is the legal effect of a disclaimer?

If the disclaimant executes a proper disclaimer, then the disclaimant will be treated as having predeceased the decedent and the disclaimant’s inheritance will vest in another individual except in the case of a spouse. IRC §2518(b)(4)(A); Treas Reg §25.2518-2(e)(2). 

11. Can a disclaimer be used by a disclaimant to avoid creditor claims?

Yes, a disclaimer is binding on creditors and does not constitute a fraudulent conveyance. Prob C §§281, 283. However, federal tax liens do attach to the disclaimed property. Drye v U.S. (1999) 528 US 49.

For example, if a hotel heiress incurred substantial debt by means of outlandish purchases, she could actually disclaim her inheritance so that creditors could not attach their claim to her inherited property. Yes, sad but true.

12. Is there a time limit to make a disclaimer?

Yes, the disclaimer must be delivered within 9 months of death (or other date of transfer) to "the transferor of the interest, the transferor's legal representative, the holder of the legal title to the property to which it relates, or the person in possession of such property." Treas Reg §25.2518-2(b).

13. Can I disclaim only a portion of the inheritance?

Yes, a beneficiary can disclaim one interest in property and retain another. IRC §2518(c); Treas Reg §25.2518-3. For example, if a beneficiary was left with 100 shares of Exxon Mobil, the person could disclaim 50 shares and keep 50 shares because stock is considered severable property. Treas Reg §25.2518-3(a)(1)(ii).