The older I get, the more I appreciate flexibility in everything financial. Life changes in unexpected ways, and optionality is a good thing, especially when decisions have to be made decades in advance of knowing their consequences. One of the best ways to provide future flexibility in estate planning is the use of disclaimers.
What Is a Disclaimer?
A properly drafted will or trust allows a beneficiary to either accept their inheritance or to disclaim it, passing it along to the next beneficiary in line. The beneficiary loses nothing from having this flexibility. They can still take the entire inheritance and use it however they like. But they gain the ability to pass it on to another beneficiary and potentially save the family a significant amount of taxes.
Consider a simple example. Let’s say your spouse is the beneficiary of your IRA when you die. But your spouse doesn’t need it, so they disclaim that inheritance. It passes on to the next designated beneficiary, which is your child. Your child is already a multimillionaire and in their peak earning years. They also disclaim the inheritance. Now, it goes to the next beneficiary, their child/your grandchild. Who happens to be 25 years old, in a very low tax bracket, and considering a new home purchase.
Your spouse now gets to avoid taking RMDs they don’t want or need. Your child doesn’t have to pay taxes in a high tax bracket on money they don’t want or need. And your grandchild gets to withdraw some very useful money from the IRA at a dramatically lower rate than you were paying when you first contributed that money to a retirement account. Your spouse could have had the money if they wanted. Your child could have had the money if they wanted. Nobody got hosed. But the money went where it could do the most good and where the family could pay the least amount in taxes.
Why would you rob your family of having that kind of flexibility if you could easily and inexpensively provide it?
What Are the Rules for Disclaiming?
Per IRC § 2518, a qualified disclaimer is
- Irrevocable
- Written
- Filed within nine months of the death, and
- The beneficiary must not have accepted any benefits (like income) from the property in those nine months.
Nine months. Lots of time. Plenty of time to do two or three or four levels of disclaimers if needed. Note that the disclaimant doesn’t get to pick the new beneficiary. That was chosen by the original owner in their IRA or life insurance beneficiary designations, their will, or their trust documents. The (potential) disclaimant just gets to choose whether to disclaim or keep the assets. And it isn’t all-or-nothing. They can disclaim half of the inheritance or 90% of it or 10% of it or just a specific part of it, such as a boat or a second house.
More information here:- The Worst Financial Gifts to Give Your Kids
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Why Not Just Accept the Assets?
Sure, you can always gift the assets away after you accept them yourself, but there can be some additional hassle, consequences, and taxes if you do. For example, the annual gift tax limit is $19,000 [2026 — visit our annual numbers page to get the most up-to-date figures]. If you inherit $100,000 and then give it away the next week, you’ll have to file a gift tax return and maybe eventually even have to pay some gift taxes as a result. Inherited IRAs can’t be given away, although if the owner of the inherited IRA dies before the IRA is completely distributed (done over 10 years for most currently inherited IRAs), the successor beneficiary continues the withdrawals under the original 10-year rule. So if you want to give away inherited IRA money while you’re still alive, you have to withdraw it all from the IRA first, pay taxes on it, and then give the remainder away. You could have skipped all that by disclaiming.
Some wealthy families might also figure out ways to save on estate and generation-skipping taxes as well with the careful use of disclaimers.
There can also be some asset protection benefits. Imagine Generation #2 owes some creditor hundreds of thousands of dollars or is tied up in some litigation. By disclaiming, those assets skip Generation#2 and move right on down the line to Generation #3 without ever being subject to the creditors of Generation #2. Or perhaps the contingent beneficiary can be Generation #2’s spouse, who isn’t being sued.
How to Provide Disclaiming Options
It is surprisingly easy to provide disclaiming options. Note that this process is generally governed by state law, so there is some variability from state to state, even though a large part of the consequences are due to federal income and estate tax laws.
With a retirement account, HSA, life insurance policy, or similar assets with beneficiary designations, you just name secondary beneficiaries, and if you want, see if you can add tertiary beneficiaries. In your will, you need to include language that specifically allows the use of disclaimers, such as “if my child disclaims, to their children.” YOU need to identify the contingent beneficiaries in your will. This is probably not a DIY project to do with online will software.
You can use similar language in a trust. Note that the secondary beneficiary doesn’t even have to be a person. It can be a trust, and the beneficiary of the trust can be the original disclaimant! The language needs to permit the beneficiary to refuse assets, directing them to pass automatically to a contingent beneficiary or a “disclaimer trust” without the original beneficiary’s control. You may need to incorporate a “takers in default” clause, which says the property will pass to specifically named individuals or a trust rather than defaulting to state intestacy laws.
More information here:What Might a Complete Plan Look Like?
I first mentioned this idea of disclaimers on this blog more than a decade ago. James Lange, a CPA/JD who has spoken at WCICONs in the past, has spent a huge chunk of his career writing and speaking about a disclaimer technique he calls the Lange Cascading Beneficiary Plan. A cascading beneficiary plan might look like this:
- The primary beneficiary of the IRA would be the surviving spouse.
- The secondary or first contingent beneficiary could be a trust where the surviving spouse gets the income, and at the death of the surviving spouse, the proceeds go to the children equally. (A “B” or unified credit or exemption equivalent trust.)
- The third beneficiary or second contingent beneficiary would simply be the children equally “per stirpes.”
- The fourth or third contingent beneficiary could be a special trust for the grandchildren to protect against inappropriate spending or investing at a young age.
At each stage, a disclaimer could be filed, which could potentially save taxes or avoid creditors.
Give your heirs some options they don’t even know they might want by adding this flexibility to your estate plan.
What do you think? Does your estate plan allow disclaimers? Would you use them? Why or why not?
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