Receive an Inheritance? No Thank You!

Receiving an inheritance is usually a good thing.  However, there may be times when you'd rather say "no thank you" to a particular inheritance.  An extreme example would be inheriting property contaminated with toxic waste.  You might decide that you're better off having nothing to do with the asset than receiving it and coping with its baggage. 

The IRS and the California Probate Code allow you to refuse an inheritance if you sign a "disclaimer" within nine months of the decedent's date of death.  If property is disclaimed, your Will or Trust can instruct where the disclaimed property will go.  If there are no instructions in your Will or Trust, such property will go to heirs specified in the Probate Code.  The use of a disclaimer is not limited to undesirable inheritances.  Given the right circumstances, a disclaimer can be a strategic tool.

One example is where a decedent dies without proper planning.  Any Separate Property that belonged to the decedent would normally be split between the surviving spouse and the children, parents, siblings, or nieces / nephews of the decedent.  If the expectation was that the Separate Property should go 100% to the surviving spouse and the family is in agreement, the children, parents, siblings, and nieces / nephews could all sign disclaimers to get the property to the surviving spouse without any adverse tax consequences for the other family members.

A second example would be where a beneficiary inheriting certain property feels that he or she has plenty of assets and doesn't want the inherited assets to be taxed as part of his or her estate.  Subject to certain limitations, the beneficiary could disclaim certain assets so that they pass to his or her children and do not have to be taxed upon the beneficiary's death.

Sometimes the use of disclaimers can be implemented when designing an Estate Plan.  A common Estate Planning strategy for married couples is to create an "A/B Trust," where the trust splits into two sub-trusts upon the death of the first spouse.  The advantage of the strategy is to use both spouse's Estate Tax Exemptions.  The downside is that splitting the Trust creates additional administration.  If a couple is not sure whether their estate will be subject to Estate Tax based on changing values to their assets the amount of the Estate Tax Exemption in flux, a "disclaimer trust" can be implemented.  The idea is that the trust will not split into two sub-trusts upon the death of the first spouse unless the surviving spouse executes a disclaimer, giving the spouse the option of dividing the trust or not.

A disclaimer can be a powerful tool and should always be considered in both Estate Planning and Estate Settlement.