How to Refuse a Bequest

Maybe you don't want that inheritance...

Maybe you don't want that inheritance...

Did your Uncle Big Bucks die and leave you his house, his savings and an investment portfolio? While many people would be happy to claim a bequest such as this, you may not want his financial burden. Taxes or other reasons may give you pause in accepting Uncle Big Buck’s legacy.

If you’re comfortable in your financial world and you don’t need to become a beneficiary, you can disclaim that inheritance and forward it on to your children or grandchildren.  Or, you can use that legacy to create a trust that benefits your descendants. By creating a trust, you can avoid double taxation (taxed when you receive the money and when your kids receive the money).

You also might want to avoid a legacy that is worth less than its market value. What if Uncle Buck’s home is subject to liens or in foreclosure? What if the stock market portfolio is worthless? What if your uncle’s savings are less substantial than the taxes you’ll owe on the entire inheritance?

In another instance, if your spouse dies and leaves all of his or her assets in order to take advantage of the unlimited marital deduction (a tax deduction that allows an individual to transfer some assets to his or her spouse tax free, creating a reduction in taxable income), you can reduce the size of the deceased’s estate and eliminate the immediate estate tax. However, this may mean that you miss out on using the exemption equivalent ($3.5 million in 2009).

Many states now permit a beneficiary to disclaim an inheritance. In some states, you can renounce the benefit and in other states you simply can refuse to accept the inheritance. If the deceased did not set up an exemption trust prior to his or her death, a qualified disclaimer can be useful. It enables the beneficiary to refuse to accept part or all of the assets, rather than receive them. The assets would then pass to the contingent beneficiary, bypass the estate of the first beneficiary, and use the first decedent’s exemption equivalent.

For state and federal tax purposes, disclaiming assets is the same as never having owned them. That’s why it’s important to follow the precise requirements of a qualified disclaimer. If the primary beneficiary does not follow these requirements, the property in question will be considered a personal asset (also known as a taxable asset).

According to the IRS (Internal Revenue Service), the term “qualified disclaimer” means an irrevocable and unqualified refusal by a person to accept an interest in property, but only if:

  1. The refusal is in writing;
  2. The writing is received by the transferor of the interest, his or her legal representative, or the holder of the legal title to the property to which the interest relates, not later than the date that is 9 months after the later of: (A) the date on which the transfer creating the interest in the person is made, or (B) the day on which the person attains the age of 21;
  3. The person has not accepted the interest or any of its benefits; and
  4. As a result of the refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either: (A) to the spouse of the decedent, or (B) to a person other than the person making the disclaimer.

A disclaimer is irrevocable. The person who disclaims the property can’t come back later, after a failed business or stock market slump, for example, and reclaim those assets. Although state laws may vary from federal laws, in most instances the two standards are similar.

This finality alone should set off an alarm in your head. Tax laws are difficult to understand, and inheritance tax laws change, it seems, every day. Before you write that disclaimer, make sure you talk with an attorney who is familiar with tax law and inheritance before you sign away Uncle Big Buck’s legacy.

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