Assignments, Disclaimers and Powers of Appointment can alter the distribution of a decedent’s estate.
First what is and who can make an assignment? A person who has a vested — legally enforceable — interest in a decedent’s estate can “assign” – i.e., transfer – part or all of their interest to another. Generally, an inheritance vests upon the decedent’s death. An assignment is a gift by the assignor making the assignment to the assignee receiving the assigned interest. Assignments create tax issues for both the assignor and assignee.
For example, consider an unmarried father who dies intestate — without a will or trust – and is survived by a son and a daughter — his heirs. Prior to settling dad’s estate, the son decides to give his one-half share to his sister and signs and notarizes an assignment of inheritance rights. The assignment is then filed with the Court. Dad’s estate, less expenses and debts, is distributed entirely to the daughter.
If an interest in real property inherited from a parent is assigned then the parent child exclusion from reassessment — for local real property taxes — only applies to the interest(s) belonging to the child(ren) who do not assign their interest(s). There is no reassessment exclusion for any transfers between siblings.
Assignments, however, almost never apply to a beneficiary’s interests in a trust. Usually, a trust prohibits beneficiaries from assigning their interest in the trust before distribution. The anti-assignment provision protects undistributed trust assets from claims by a beneficiary’s creditors.
Next, disclaimers are used when a beneficiary, or heir, refuses to accept a gift or inheritance. You cannot force someone to receive a gift or an inheritance. To be valid disclaimers must satisfy the following requirements: be unconditional, be in writing, and be timely (i.e., generally, within nine months of the transfer), and, when real property is involved, also be filed with the county recorder where the real property lies. Unlike assignments, the person disclaiming their interest cannot say who receives the disclaimed interest. A disclaimer is not a gift by the person disclaiming. Lastly, one cannot have accepted any benefits from the property being disclaimed, such as the income from an income producing asset.
The person disclaiming their gift or inheritance is treated as if they had predeceased the person who made the gift. We see who is then entitled to inherit.
For example, a decedent’s trust leaves a share of the decedent’s trust estate to a named beneficiary and otherwise, if he does not survive to inherit, to the beneficiary’s descendants by right of representation. The beneficiary survives and timely disclaims. The beneficiary’s living descendants would then inherit by right of representation.
Unlike assignments and disclaimers, powers of appointment are created within a person’s estate planning, e.g., a trust or will, for future use. A power of appointment allows the power holder to say who receives a gift/distribution from a trust or an estate. The power of appointment is either a limited power that allows gifting to certain persons or is a general power that allows gifting to anyone at all, including the power holder, the power holder’s estate and the power holder’s creditors. Powers of appointment are used for a variety of estate planning reasons.
For example, a husband’s and wife’s joint estate planning may give the spouse who survives a limited power of appointment over the deceased spouse’s separate trust estate. The limited power of appointment might allow the deceased spouse’s estate to be divided equally or unequally amongst the deceased spouse’s children as the surviving spouse sees fit after the deceased spouse’s death.
Anyone who wants to proceed with making an assignment, a disclaimer or exercise of a power of appointment should consult a qualified attorney. There are tax and other issues to discuss and drafting requirements to these legal instruments that benefit from the expertise of a qualified attorney.