How to Disclaim an Inheritance (And Reasons Why You Would)
The idea of turning away inherited assets can be a difficult one to grasp for many people. Wealth often creates complexity and for some, being the beneficiary of an inheritance (typically from parents), can be a delicate situation to manage. Oftentimes there are siblings who are in vastly different financial circumstances and splitting an equal share of their parents’ estate may not seem reasonable, or perhaps someone simply doesn’t want the assets.
For whatever reason, if you don’t want the inheritance that has been left to you, what should you do? While uncommon in practice, there is the option to decline, or disclaim, the inheritance. Below are a few things to keep in mind while navigating this decision.
Why Would You Want to Disclaim Assets?
As mentioned above, although rare, there are circumstances where you may not want an inheritance. Below are a couple of possible scenarios:
- You are financially secure and do not need the assets, while you know the next beneficiary in line could benefit from them greatly.
- Circumstances have changed since the time the will/trust was created and no longer align with the original owner’s intentions and you would like to honor their wishes.
- Taking ownership of the bequeathed assets would have negative tax consequences (described further below).
Disclaiming Assets for Tax Reasons
While the few scenarios above address fairly straightforward reasons to disclaim assets, for wealthy individuals, tax consequences can also be a key consideration in this decision. If you are a high net worth or ultra-high net worth individual, hopefully you have already worked with your financial advisor and estate attorney to establish an estate plan that fulfills your wealth transfer goals. If you haven’t, read our blog about the importance of having a trusted advisor here.
With a plan in place, a sizeable inheritance could significantly alter the amount of estate taxes owed. Consider this hypothetical example: Matt and Mary Mason have two children, three grandchildren, and a net worth of $50M. They have worked with their financial advisor and attorney to establish an estate plan that leaves their children and grandchildren an inheritance and a generous donation for their favorite charity. In doing so, the Masons are satisfied that although estate taxes will be owed at their death, they will be minimal. When Matt’s wealthy aunt passes away, he is surprised to learn that he (and after him, his children and their heirs) are the beneficiaries of her estate. The Masons do not need the money and would prefer to keep their estate tax bill to a minimum. Matt decides to disclaim the inheritance, bypassing taxation in his estate, and shifting the assets to his children.
What Happens When Assets are Disclaimed?
It is important to note that when an individual decides to disclaim an inheritance, they do not get to re-direct those assets to a person or entity of their choosing. The assets will pass on to the next beneficiary in line, as determined by the deceased person’s will, trust, or by intestate law. Knowing whom the assets will go to next may play a key role in choosing whether to disclaim or not.
It is also worth noting that disclaiming assets is not an all or nothing situation. Suppose you are the beneficiary of an estate and are set to receive cash, stocks, and an old home in need of extensive repair. While you would welcome the liquid assets, you have no interest in spending time or money renovating the house. In this situation, you could disclaim the house (for it to pass on to the next beneficiary according to the original owner’s wishes) and keep the cash and stocks.
How Do You Disclaim Assets?
The process to disclaiming inheritance is fairly straightforward, although there are a few important rules and considerations. Always make sure to discuss with an attorney before submitting any legal paperwork.
- The disclaimer must be made within 9 months of the death of the owner of the assets. The only exception to this rule is if the beneficiary is a minor; they will have 9 months after turning 21 to disclaim the assets.
- The disclaimer must be in writing and contain the following:
- Name of the deceased who left the assets to you
- A description of the asset(s) being disclaimed
- An acknowledgement that you irrevocably give up the right to any future benefit of the asset(s)
- The letter must be signed and often notarized, so be sure to check with the appropriate person managing the estate (trustee, executor, or attorney) before delivering any documents to them.
If you ever find yourself in the predicament of deciding whether or not you want to keep an inheritance left to you, be sure to check in with a financial professional or attorney. Not only can they help guide you through the decision making process, but they can assist in making sure proper processes and documentation are filed – whether you keep the assets or not.
Also keep in mind that if you anticipate an inheritance you don’t want, have the conversation with your loved ones ahead of time and ask to be written out of the will/trust. Although it may be uncomfortable at the time, it can save lots of time and energy in the future.
IMPORTANT DISCLOSURES AND DISCLAIMERS
This hypothetical case study is provided for illustrative purposes only and does not represent work we’ve done on any client of Lake Street Advisors nor is it intended to be representative of any client experience. Instead it is meant to provide an illustration of Lake Street Advisors approach to planning and tax strategies we believe would be appropriate given the facts and circumstances of the hypothetical case presented.
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