By Jenny Kiffmeyer, J.D – The Retirement Learning Center

Beneficiary Disclaimer – Is is All or Nothing?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New Mexico involved disclaiming an inherited IRA.  The advisor asked: “One of my clients is the beneficiary of an IRA and may want to disclaim the assets—at least in part. Could she do a partial disclaimer?”

Highlights of the Discussion

According to Treasury regulations, a beneficiary may disclaim a whole or partial interest in inherited property (e.g., an IRA or retirement plan account balance) and be treated as if he or she had never had rights to the property [IRC Sec. 2518(b)]. By executing a “qualified disclaimer” of benefits, the disclaimant effectively relieves herself of any tax consequences of receiving (and potentially gifting) the property that would have otherwise applied. Therefore, disclaimers are typically used as a tax planning tool, making consultation with a tax advisor essential. However, individuals may also choose to use a beneficiary disclaimer as a pseudo legacy planning tool and disclaim their beneficial interests so that others may receive the assets. This usage is limited by the qualified disclaimer rules, which require that the disclaimant not be allowed to choose to whom the disclaimed assets will eventually pass.

A beneficiary disclaimer must be “qualified,” which means it must meet the following criteria.

1. It must be in writing.
2. It is irrevocable.
3. The disclaiming party must give the written disclaimer to the holder of the property’s legal title (e.g., the IRA or plan administrator) not later than nine months after the later of
   • The death of the original owner (e.g., IRA owner or plan participant), or
   • The day on which such person attains age 21.
4. The disclaimant may not have accepted the disclaimed interest or any of its benefits.
5. The disclaimed interest shall pass—without direction on the part of the disclaimant— to any remaining beneficiaries.
6. The disclaimer must meet all requirements of applicable state law.

A beneficiary of an IRA or retirement plan account balance that properly disclaims inherited assets during the period between the IRA owner’s or plan participant’s death and September 30 of the year following the year of death will not be considered a designated beneficiary for distribution purposes [Treasury Regulation (Treas. Reg.) 1.401(a)(9)-4, Q&A-4].

Regarding disclaimers of a partial interest, pursuant to Treas. Reg. 25.2518.3, it is possible for a beneficiary to disclaim less than an entire interest in property. The key to a valid partial disclaimer is the ability to identify a “separate interest” in severable property. Severable property is property that can be divided into separate parts each of which, after severance, maintains a complete and independent existence. For example, a beneficiary of shares of corporate stock may accept some shares of the stock and make a qualified disclaimer of the remaining shares. Because the rules are intricate, guidance by tax and/or legal advisors is recommended.

Conclusion

A qualified disclaimer is an irrevocable refusal by a beneficiary, including a beneficiary of retirement assets, to accept an interest in property pursuant to IRC Sec. 2518(b). A beneficiary can refuse to accept her entire interest in property or a partial share under certain circumstances. The nuances of beneficiary disclaimers are many. Therefore, anyone interested in executing a qualified disclaimer is cautioned to seek the guidance of an experience tax and or legal advisor for his or her specific situation.