The Necessity of Disclaimer Planning

Summary:  All Colorado wills and trusts should have disclaimer provisions in order to provide maximum asset protection and reduction of income tax and estate tax. 

It is Legal Malpractice to do a Will or Trust Without Disclaimer Planning Provisions

The use of a disclaimer after death can be used to reduce income tax and estate tax, as well as protect estate assets from the creditors of estate or trust beneficiaries.

Since the use of a disclaimer is an option which must be exercised by the survivors within 9 months after death, there is no cost or penalty for including disclaimer provisions in a will or trust. In contrast, unless the will or trust includes disclaimer provisions, it is very unlikely that a disclaimer can be made.

Therefore, all wills and trusts should have disclaimer provisions.  The failure to include them may be legal malpractice by an attorney.  There is no excuse for omitting such optional provisions.

What is a Disclaimer?

A disclaimer is a refusal by an estate or trust beneficiary to accept a distribution or inheritance.  The benefit of using a disclaimer is that the distribution or inheritance is protected from the claims of the creditors of the beneficiary.  It can also be used to reduce the income tax and estate tax on the distribution.

However, most beneficiaries will not disclaim property unless certain disclaimer options and benefits are listed in the will or trust.  This means that all wills and trusts should include the optional disclaimer provisions.

When Should a Disclaimer be Used?

1.  When an estate or trust beneficiary has owes money for taxes or other bills, such as business or personal judgments.  Unless a disclaimer is used, all or a portion of the distribution will be lost to creditors.

2.  When the beneficiary has potential tax or creditor problems which are compounded by the acceptance of the distribution.  Examples include medicaid planning, medical bills, estate taxes, second or later marriages, marital deduction estate planning, etc. 

3.  When the beneficiary is in a high estate tax or income tax bracket.  By disclaiming the distribution, the distribution can be distributed to others who are in lower tax brackets.

 What Happens If Proper Disclaimer Provisions Are Not Included in the Will or Trust?

In most cases, the beneficiary will not disclaim because he or she does not have any incentive to disclaim.  This results in the loss of all or a portion of the distributed estate or trust property.

In other words, money or other property is lost to increased taxes or creditors because the beneficiary does not have any incentive to disclaim and protect the property.

There is no excuse for the omission of disclaimer provisions by a Colorado attorney.