Assignments vs. Disclaimers: What is the difference between an assignment and a disclaimer?
In contrast to a disclaimer, an assignment is when a person directs his or her inheritance or power of appointment to someone else. A disclaimer, on the other hand, is a person’s unwillingness to exercise any power over an inheritance or power of appointment.
In other words, with an assignment, you direct what happens and with a disclaimer you refuse to ever receive any control over an asset.
However, what are the practical uses for disclaimers and assignments and why do they matter for probate?
(Legal disclaimer: Yes, I am an attorney, but, no, I am not your attorney. Nothing in this post or on this site is legal advice. Nothing in this post or on this site creates an attorney-client relationship. This information is merely educational and informative. You should discuss your facts and circumstances with a licensed attorney in your jurisdiction.)
What is an Assignment?
Let’s talk about assignments in terms of gifts.
If mom gives you a sweater for Christmas, and you choose to regift it, you have assigned that sweater to someone else.
Your regift is redirecting the sweater away from you and to someone else specific –assigning it to someone else.
An assignment, unlike a disclaimer, which I will further discuss below, is your choice to actually give away the power that you have over an item, asset, or right to someone else.
You had 100% rights to the sweater when your mother gave it to you. When you relinquish that sweater to someone else, that other person now has all of your rights. Now, that person has 100% rights to the sweater, and you don’t.
Partial Assignments
If, on the other hand, you don’t want to completely give something away, you might make a partial assignment.
Perhaps you let your sister borrow the sweater. She has the power to use and wear the sweater for a limited amount of time, but you are still the owner.
Assignments and Probate Estates
Assignments and partial assignments are especially important in estates and probate.
Assignments are your opportunity to correct a wrong, to direct an asset to someone else, or to even make a gift for tax purposes.
In other cases, it might be your opportunity to get out from under an asset that you don’t want to be saddled with.
If, for example, your parents leave you and your siblings the childhood home, perhaps you want nothing to do with it.
In that case, you might assign your portion of the childhood home to your siblings so you don’t have to deal with renovations, sales, or other issues.
Or, perhaps you received a gift that you weren’t properly supposed to receive. Perhaps, you are an ex-spouse whose deceased ex-spouse never updated his or her estate plan.
If you are an ex-spouse who now receives the family assets when they should go to the children, you might assign your ill-gotten inheritance to the children.
RELATED POST: Estate Planning and Divorce
However, be careful with assignments. Assignments might carry tax concerns. If you have tax concerns about receiving a gift, then maybe you are better off with a disclaimer. I’ll talk more about taxes and assignments below, but first, let’s explore what a disclaimer is.
What is a disclaimer?
Unlike an assignment, a disclaimer is your complete relinquishment of control over an asset. A disclaimer not only relinquishes the asset, but it also relinquishes your power to direct where the asset goes.
You don’t get to decide who receives it or how they use it. No conditions; no strings.
To be effective, a disclaimer must be qualified meaning that it must be in writing, properly received, delivered, and made within a proper period of time. (https://www.investopedia.com/terms/q/qualifieddisclaimer.asp)
What does a disclaimer actually look like? Let’s go back to the gift analogy.
Take that sweater your mom gave you, for example. If, instead of giving it to a friend, you simply leave it by the road with a “free” sign, you disclaim it.
You leave it for anyone to take without any strings attached.
For legal purposes, you never exercise any control over it at all. You refuse to even receive it, wear it, or take it home.
You don’t direct it to anyone. You simply take your hands off the proverbial wheel and leave it for someone else to make the decisions.
Partial Disclaimer
Unlike a partial assignment, where you might grant a limited license in an asset, there is no such thing as a partial disclaimer where you retain some rights. You could disclaim a partial interest, but a disclaimer refuses to receive a gift at all.
When you disclaim an item, you irrevocably give up all right, title, interest, and control over the asset. You can’t get it back; you can’t choose where it goes, and you can’t decide what someone does with it.
Disclaimers and Probate
If you receive an inheritance, and you want to disclaim it, your state will dictate what happens to the asset.
Although a disclaimer does not leave the asset up for grabs for anyone in the world like in the sweater example, you do have to know that a disclaimer relinquishes your control over the inheritance.
In many states, a disclaimed inheritance passes to the next intestate heirs.
What does that mean?
In the event of a disclaimer, in probate or an estate, you don’t simply leave the asset to the person of your choosing (an assignment), instead, you leave it for the next person in line.
Take that house your parents gave you, for example. If you want to disclaim your interest in the house instead of dealing with it, your disclaimer leaves it to your children or heirs rather than your siblings.
If you want the house or the asset to go to a specific person, sign an assignment. If you want the house or asset to go to the next person in line without any tax consequences, then sign a disclaimer.
In some cases, those people might be one and the same. But, I have seen plenty of people sign a disclaimer thinking that they were passing the asset to a specific person only to find out that they relinquished the asset and the control over the asset to someone completely different.
Regardless, a disclaimer may still be right for you if you have tax concerns.
Assignments, Disclaimers, and Taxes
Beyond the ability to control who receives an asset, the biggest concern about disclaimers and assignments are taxes.
No, I am not a tax attorney, and no, nothing here is tax advice. However, you should know that each decision has tax consequences.
Tax Consequences of an Assignment
An assignment, like I already mentioned, is your ability to continue to exercise control over the direction of an asset.
Like a ball that you catch and throw to the next person, an assignment is treated as though you received the asset and then gave it to someone else.
You received the sweater, then you gave it to someone else. You received the house, then you gave it to your siblings.
An assignment, for tax purposes, is treated as a gift. Because you had control over the asset and then gave it to someone else, you are treated as having not only received the inheritance (and any corresponding tax liability) but also having made a gift.
Making a gift has its own tax consequences. Your gift may eat into your annual exclusion, your lifetime unified credit, or even your estate taxes.
Assignments and Charities
If you make that assignment to a qualified charity, foundation, NGO, or 501(c)3, on the other hand, you might not only receive the asset but also the deduction.
For the most part, gifts to qualified charities are tax deductible.
Therefore, for some, signing an assignment as a part of an inheritance is a strategic way to receive a tax-free, stepped-up asset and then take an enormous tax deduction.
RELATED POST: What’s the big deal about stepped-up cost basis?
A disclaimer would have completely different tax consequences, on the other hand.
Disclaimers and Taxes
Because a disclaimer is your “hot potato” moment, your avoidance of receiving the gift, or your taking the hands off the wheel of power and control, for tax purposes, you never receive a disclaimed asset.
For tax purposes, you are never treated as having received the asset (the gift or inheritance) if you properly execute a legitimate disclaimer (IRS LINK FOR TIMELY DISCLAIMER).
A qualified disclaimer for tax purposes must meet the following criteria:
- (1) The disclaimer must be irrevocable and unqualified:
- (2) The disclaimer must be in writing;
- (3) The writing must be delivered to the person specified in paragraph (b) (2) of this section within the time limitations specified in paragraph (c)(1) of this section;
- (4) The disclaimant must not have accepted the interest disclaimed or any of its benefits; and
- (5) The interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.
https://www.law.cornell.edu/cfr/text/26/25.2518-2#:~:text=(1)%20Requirements.,(2)%20Delivery.
Therefore, the IRS completely ignores proper disclaimers. No gift received; no gift made.
Contrastingly, other government entities may not ignore disclaimers. Disclaimers may be a problem for people who receive state or federal benefits.
Disclaimers and Government Benefits
If you receive state or federal means-tested benefits, disclaimers are generally prohibited.
The government will not generally allow you to intentionally deprive yourself of a valuable asset just so you can keep your insurance, aid, or stipends.
For this reason, not everyone is eligible to sign a disclaimer. And, a gift made to a person who receives means-tested government benefits might just be a horrible way for them to lose their insurance or other needed benefits.
RELATED POST: Supplemental Needs Trusts: How to care for your special needs child.
Even small gifts of a few thousand dollars, an interest in a home, or other assets might be just enough for someone to lose their Medicaid while not providing enough assets to actually provide care.
Sometimes well-meaning grandparents will leave cash gifts to grandchildren and completely destroy a grandchild’s state health benefits.
Most of the time, a disclaimer will not correct the situation. In those instances, the grandchild may not be legally eligible to sign a disclaimer due to the state and federal restrictions against disclaimers for means-tested benefits.
However, in the event a disclaimer is available, no taxes will be owed.
Disclaimers and Charitable Gifts
You should also know, however, if your disclaimer does cause the asset to pass to a charitable recipient, while you receive no tax burden for receiving the gift, you also will receive no tax benefit for making a gift.
Because you never had control over the asset, you didn’t have the right to direct it to anyone else. Therefore, you didn’t give it away. You didn’t make a charitable gift.
If you want a deduction, then an assignment will not be the proper course of action for you!
Why would you use an assignment or disclaimer for probate?
In some instances people receive inheritances or gifts that they don’t want either for personal or tax reasons.
In those cases, they may simply want to give it to someone else or not receive it at all.
If someone receives a gift and wants it to go to a specific individual, then he or she should sign an assignment. However, he or she should also understand the tax consequences of assignments.
In the same way, if a person receives a gift and simply wants nothing to do with it, then he or she might rather sign a disclaimer. While disclaimers provide no power or control, they also have no tax consequences if done correctly.
Which one is right for you depends on your facts, circumstances, benefits, intestate heirs, and even your tax status.
That’s why you should always consult with a reputable attorney (and probably a CPA) before you sign a disclaimer or assignment. You wouldn’t want to have unnecessary tax consequences or watch the family home pass to some stranger.
Meet with an attorney to determine whether a disclaimer or an assignment is right for you.