At our law firm, we dedicate most of our time to helping our clients plan their estates, address issues involving incapacity and long term care planning, and helping to administer their estates and trusts after their gone.
However, we also regularly get questions from our clients when they are the beneficiaries or heirs of someone else’s estate.
When receiving an inheritance, few people consider that there may be a big decision looming. You are still mourning the passing of someone dear to you when you learn about the inheritance. While you continue with your daily life, numb from the emotional loss, the estate or Trust Administration process continues, which eventually leads to the distribution of your inheritance, either outright or in a Trust.
However, there may be a better way. Accepting the inheritance is a valid option, but it is not the only option. You can also choose to refuse or “disclaim” the inheritance.
How Do You Disclaim?
A refusal must meet several requirements, making it a “qualified disclaimer.” These requirements are quite technical, and include the following:
- It must be an unqualified, irrevocable, written refusal to accept
- It must be received by the holder of the property within nine months of when your right in the property accrued (such as the date of your relative’s death)
- If you are under 21 years of age when the right accrued, the right is deemed to accrue at your 21st birthday
- You cannot have previously accepted the property or any of its benefits (such as cashing dividend checks, etc.)
- You cannot direct where the property will go after your refusal
- Unless you are the spouse of the transferor, the property cannot go to you or for your benefit as a result of your refusal
Why Might You Disclaim?
In short, you would disclaim if you prefer the assets to go to the next person or entity in line rather than to you. For example, if you have sufficient assets of your own, you may prefer to have the assets go to your children.
Determine where the assets would have gone if you had died before the person leaving them to you. Often, the assets would go to your descendants in the event of your death. If so, the disclaimer would divert the assets to your children.
A disclaimer is preferable to accepting and then gifting the assets as you avoid having to make a taxable gift. A qualified disclaimer is not a taxable gift even though the assets end up where you want them to go.
Disclaimers and Estate Planning
Disclaimers can be useful during the estate planning process as well. For example, IRAs, 401(k)’s, and other tax-deferred vehicles can be difficult assets to plan for. There are significant income tax advantages leaving them to your spouse.
However, for estate tax reasons, it may be better to leave them to a Trust for the whole family, which would not qualify for the income tax advantages. You can designate your spouse as the primary beneficiary and the Trust as a contingent beneficiary. By doing this, your spouse can choose to disclaim, thereby sending the assets to the Trust, if it is the better strategy at the time of your death.
Disclaimers can be both powerful and complex. If you are receiving an inheritance, a qualified estate planning attorney can help you determine whether to disclaim.
Final note: a disclaimer must be done within nine months and if you accept any benefits from the disclaimed assets you will not quality to do the disclaimer.
- Estate Planning and Charitable Giving — Key Points - March 29, 2020
- Over-Funding Your Retirement Plan: A Potential Estate Planning Problem - March 27, 2020
- Best Places to Retire: State Taxation - March 25, 2020