Jane called to tell me that she is about to receive an inheritance from one of her aunts and asked me if there was anything special she had to do.

I asked Jane if she needed the money and she indicated that she was fine with her current financial situation and that the inheritance would increase her Massachusetts taxable estate to well over $1,000,000. Jane has four children, each of whom could use the money now. Jane asked whether it would be wise to gift this money to her children.

Rather than take the inheritance and then gift it to her children, I advised Jane to consider disclaiming all or a portion of the inheritance. A disclaimer is a post mortem tax planning device by which the person disclaiming is deemed to have predeceased the donor. There is no gift tax associated with this as the funds never get into the beneficiary's hands.

The rules in connection with disclaimers are strict: The beneficiary cannot direct where the funds will go when disclaimed; they will pass to those who would have taken the inheritance in the event that the beneficiary had predeceased the donor. The disclaimer must be irrevocable and must be done within 9 months following the death of the donor. The beneficiary must not have taken any income such as interest, dividends, or rental income from the funds to be disclaimed.

When Jane considered this, she mentioned that one of her children was receiving government benefits due to a disability. If Jane disclaims the inheritance, one-fourth of it will pass directly to the child with the disability, potentially causing the government benefits to be discontinued. Another of her children is in the midst of a bitter divorce; the share for this child would be considered a marital asset and would be subject to the division of assets rules for divorce in her state. Another of her children has a huge amount of debt and is considering bankruptcy. The share passing to this child would have to be used to satisfy the debts owed to the creditors.

While on its face the disclaimer seems to be a terrific idea, Jane's family circumstances argue in favor of some other approach. At the end of the day, I advised Jane to take the funds and put them into her living trust; upon her death, the terms of the trust can provide creditor and asset protection for the children.

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