Posted by: The Life and Legacy Planning Group
Why would anyone want to refuse an inheritance? Although it is surprising to many, there are several circumstances when declining an inheritance can be beneficial. The law does permit you to refuse an inheritance if you comply with certain strict requirements. The legal term for a refusal of an inheritance is a “disclaimer,” which is defined as an irrevocable and unqualified refusal to accept an interest in property.
When Is a Disclaimer Beneficial?
(1) Avoidance or reduction of estate, gift, and income taxes. In 2019, the federal estate tax exclusion amount is $11.4 million for an individual and $22.8 million for a married couple. This means that only estates that exceed this amount are subject to federal estate tax. Because most people do not such a sizable estate, using a disclaimer to avoid federal estate taxes is less common now than in the past. However, some states have estate or inheritance taxes applicable to estates of a much lower value. In Illinois, an estate over $4 million is subject to the Illinois estate tax. Disclaiming an inheritance may make sense if the next beneficiary in line (as named in the will or under state intestacy law) is taxed at a lower rate than you.
In addition, a disclaimer provides a way for you to provide a gift to the next beneficiary in line without having to worry about the gift tax. If you decide to disclaim an inheritance, for tax purposes, it is considered to have never belonged to you. Obviously, you cannot make a gift of something that was never yours! As a result, it does not count towards your federal annual gift tax exclusion amount (in 2019, $15,000 for an individual and $30,000 for a married couple) or your federal lifetime exclusion amount of $11.4 million for an individual.
If your inheritance is an asset that produces income, such as an IRA, and it will likely shift you into a higher tax bracket, a disclaimer may be beneficial if you do not need the extra income. Of course, the next beneficiary in line will also benefit, especially if that person is in a lower tax bracket.
(2) Eligibility for certain benefit programs. If you are trying to qualify for certain government benefits at some point in the future and the inheritance would jeopardize your eligibility, disclaiming the inheritance may enable you to become eligible.
Warning: For some benefit programs, an effective disclaimer must occur several years before you apply for aid. Generally, government benefit programs will not allow you to disclaim an inheritance when you are already receiving aid in order to maintain your eligibility—or if you do disclaim an inheritance, you may be disqualified from receiving those benefits. Check with us to make sure that a disclaimer will not be viewed as invalid under state or federal law.
(3) Allowing the inheritance to pass to another beneficiary. If you do not need an inheritance and the next beneficiary in line does need it, a disclaimer can allow it to pass to that beneficiary with minimal expense or hassle. It will not be counted as a gift from you, so you will not have to worry about the gift tax.
A disclaimer can also be used as a way to correct uneven inheritances. For example, if a parent intended for his two children to receive inheritances of equal value, but one of the children receives an asset that has decreased significantly in value from the time the will was drafted, the child who received the inheritance of higher value can disclaim all or part of her inheritance to help realize the parent’s original intention. This strategy will only work if the person who received the smaller inheritance is the next beneficiary in line. It is important to keep in mind that the person who is disclaiming the inheritance has no control over who will receive the inheritance after the disclaimer: the identity of the next beneficiary in line is the person named in the deceased person’s will or trust, or if there is no will or trust, the person specified in the state intestacy law.
What Are the Requirements for a Qualified Disclaimer?
Some aspects of disclaimers are governed by federal tax law and others by state property law. Under federal tax law, which regulates how disclaimed property is treated for tax purposes, a “qualified disclaimer” must meet the following requirements:
- The disclaimer must be in writing;
- The writing must be delivered to the person controlling the property (usually the executor or trustee);
- The writing must be delivered within nine months after the interest was created or the disclaimant turns 21, whichever is later;
- The disclaimant must not have accepted the disclaimed interest or any of its benefits (except for a distribution from an inherited IRA under limited circumstances); and
- The property must pass without the direction of the disclaimant according to the decedent’s plan of distribution.
State law controls which types of property can be disclaimed as well as the requirements for a valid disclaimer. The laws of some states mirror the federal tax law, but others have different requirements. We can help ensure that your disclaimer is valid under both state and federal law.
Contact Us Today
Disclaiming an inheritance is a strategy that you may not have considered, but it may be able to help you achieve your estate planning and tax-saving goals. We can help you evaluate your individual circumstances to determine whether a disclaimer will benefit you, and we can assist you in avoiding any possible pitfalls. Give us a call today to set up a meeting.