Most people assume when they receive an inheritance, either through a will or a trust, that they must accept it. This is actually not the case as a beneficiary is also allowed to disclaim, or not to accept, the inheritance. Refusing an inheritance may seem like an alien concept, but can actually be the best course of action for many beneficiaries in some situations.
There are many reasons to disclaim an inheritance, with the most common reason being to avoid costly taxes. A common example of this might happen when parents leave money to affluent adult children. In this case, the children could disclaim the inheritance in order for the grandchildren to receive the inheritance instead. The money would then be taxed at the grandchildren’s tax rate rather the adult’s rate, which could save a large portion of the inheritance from being taxed. In addition, if the disclaimed assets would not be subject to the estate taxes of the parent.
Letting the inheritance pass to the next beneficiary through a disclaimer can be a much more efficient process compared to the beneficiary accepting the gift and passing the gift to the next beneficiary herself. This is especially true if the gift is real property as is does not require the first beneficiary to go through the re-titling process. Someone with a large estate can also use a disclaimer to save on gift taxes, which will be incurred if the beneficiary takes the inheritance and passes it to another person.
A disclaimer can also be used for personal reasons, such as when a beneficiary knows another beneficiary needs the money more than she does. A good example of this occurs when a parent leaves her estate to two children, and names each child the alternative beneficiary. In this scenario lets assume one child is a doctor and the other is a school teacher who supports a large family. The doctor may disclaim the inheritance so the schoolteacher receives her share of the inheritance because she knows the schoolteacher needs the money more.
In some cases there are restrictions on funds or assets that make them much more valuable to the children and a disclaimer can be used to remove the restrictions.
A beneficiary may wish to disclaim an inheritance if she is facing bankruptcy. In Florida, the bankruptcy law is complicated and may not allow a beneficiary to become a disclaimant. We recommend consulting with a bankruptcy attorney before disclaiming an inheritance in order to avoid any fraudulent transfers of assets.
Beneficiaries often disclaim property that has become undesirable. A property might become undesirable for many reasons such as when extensive repairs are needed, or the property has incurred large debts. It might often cost the beneficiary more to use or sell the property, and in taxes, than it would be worth. A disclaimer would allow the property to go to another beneficiary or back to the settlor’s estate.
All disclaimers should be done according to the Internal Revenue Code § 2518 to be valid, and should be prepared by an experienced estate-planning attorney. For more information, contact The Law Office of David Goldman at 904- 685-1200.