- Asset Protection Planning
- Business Succession Planning
- Charitable Giving
- Disability and Special Needs
- Elder Law
- Executor and Trustee Responsibilities
- Financial Powers of Attorney
- Inheritance Planning
- Lifetime Gifts
- Medical Directives
- Planning for Minors
- Retirement Accounts
When You Should Refuse an Inheritance
Although seemingly counterintuitive, there are many reasons why a person who is to inherit assets under the terms of a loved one’s estate may wish to disclaim (that is, refuse) the inheritance. Some of these reasons are completely overlooked by heirs who stand to gain from disclaiming.
If a Beneficiary Is in Debt
Inherited assets are generally not safe from a beneficiary’s creditors. Therefore, if a beneficiary is in debt, the beneficiary’s inheritance may quickly vanish in order to satisfy creditors. To avoid this fate, a beneficiary must step out of line, allowing the assets to pass to the contingent beneficiary.
As a Corrective Measure
Too often, people pass on with an outdated estate plan that does not convey their most recent wishes for the distribution of their estate. In such cases, the estate is often distributed by the terms of the estate plan, without regard for the decedent’s actual—and sometimes well-known—wishes. A beneficiary can set things right by disclaiming an inheritance and allowing it to pass to a more appropriate beneficiary. It is also possible for a beneficiary to disclaim only a portion of an inheritance.
Consider the following example: During their lifetimes, Bill and Barbara had two children, Sam and Sally. Before Bill and Barbara died, they gifted a home worth $1 million to Sam. Bill and Barbara subsequently died together, leaving $2 million to be split between Sam and Sally so that each would receive $1 million. If Sam does not disclaim, Sam will receive a total of $2 million in gifts, consisting of the $1 million home and the $1 million in cash, and Sally will receive a total of $1 million. However, Sam believes that this would be unfair to his sister, so he decides to disclaim $500,000. By partially disclaiming his inheritance, Sam will receive $1.5 million from his parents, consisting of the $1 million home and $500,000 in cash, and Sally will receive an equivalent $1.5 million, consisting of the $1 million she was already entitled to receive and the $500,000 that her brother disclaimed.
To Avoid Taxes
Inheritances often give rise to gift tax liability. Beneficiaries who do not need the inheritance they are to receive often choose to disclaim the inheritance in order to pass the assets to the next generation. This allows any tax liability on the gift to be taxed in the lower tax bracket of the next generation family member.
Consider the following scenario, with the estate and gift exemption at $10 million and the estate and gift tax at 40 percent: Jordan has a net worth of $10 million, and his family consists of his two children, Doug and Deb. Jordan’s distant uncle Charles dies. Under the terms of Charles’s last will and testament, $10 million is left to Jordan if Jordan is living, and if not, to Doug and Deb. If Jordan accepts the gift and dies with $20 million, he would owe $4 million in estate and gift taxes to the Internal Revenue Service. That means that Doug and Deb would each receive $8 million from Jordan at his death. If, however, Jordan disclaims the gift from Charles, no estate taxes would be owed at Jordan’s death. Doug and Deb would each receive a total of $10 million, consisting of $5 million from Charles and $5 million from Jordan.
If you are considering disclaiming your inheritance, it is important to discuss your intentions with a knowledgeable estate planning attorney because the disclaimer must meet strict statutory and timing requirements in order to avoid adverse tax consequences. Importantly, once you have disclaimed an inheritance, you cannot change your mind.