Sometimes it makes sense to look a gift horse in the mouth. Suppose you expect a whopping inheritance from an elderly parent, and you plan to pass on Mom's or Dad's assets to your children because you don't need the money.
Example: Avoid 'marital problems'
Bottom line: No federal estate tax when the husband dies, and none when the wife dies either.
Strategy: Turn down the inheritance. You can use a "qualified disclaimer" to keep your mitts off the money. Have an attorney provide the necessary paperwork.
If your parents' assets bypass you on their way to your kids, the family can cut its overall estate-tax bill. Similarly, a disclaimer may save tens of thousands of dollars in estate taxes when a spouse passes away.
Say a husband and wife own $3 million in assets. They have two adult children. Assume the husband dies in 2008 and leaves his entire estate to his wife. The unlimited marital deduction covers the entire amount, so the wife won't owe any federal estate tax.
But suppose the wife dies shortly thereafter. (The estate-tax exemption equivalent for 2008 is scheduled to remain at $2 million.) Thus, $1 million of the wife's assets will be exposed to estate tax after using the federal tax exemption. The estate-tax bill comes to a whopping $450,000.
Alternatively, the wife can disclaim part of the bequest. Example: If she bypasses $1 million in assets, that amount can be passed to her two children without any estate-tax consequences. The transfer is completely sheltered from estate tax by the exemption for the husband's estate.
Let's take a closer look: A qualified disclaimer is a written, irrevocable decision by the estate's beneficiary to refuse all or part of a bequest. The beneficiary must make the disclaimer within nine months of the decedent's death and before the property has been received. The main object here is avoiding an extra estate-tax bill. Under the current estate-tax rules, a person who dies in 2008 can effectively pass up to $2 million estate tax free to nonspouse beneficiaries. The estate-tax exemption is scheduled to increase to $3.5 million in 2009. Even better: The federal estate tax goes away completely in 2010.
However, unless Congress amends the law, the estate tax will be revived in 2011 with only a $1 million tax-exemption shelter. So you still must plan carefully to avoid dire estate-tax consequences.
Estate-tax dilemma: When you receive an inheritance from a parent, any amount above the estate-tax exclusion is subject to estate tax when you die. Thus, the same assets could be taxed twice, once in your parents' estate and again in your estate.
A qualified disclaimer avoids that harsh result. Federal estate tax is due only once when the assets pass to your children. If your parents' estate is worth less than $2 million, no estate tax is due, even if those assets could be worth considerably more upon your death.
