Saying “No Thank You” to an Inheritance

Inheritances are often compared to winning a lottery: suddenly, without any work or effort on your part, you are handed a check or title to assets and your net worth instantly increases.  However, being entitled to an inheritance is not always akin to hitting the jack pot.  There might be times when you would before to say “no thank you” to an inheritance.

One common situation might be where you are entitled to assets with liabilities.  If a parcel of real property has environmental contamination, for example, and the owner is legally and financially responsible for the clean-up, you might prefer to decline that inheritance.

Another common situation might be where you feel that you already have enough assets and you might be worried about future estate tax.  You might prefer that your children or other family members receive the inheritance instead.  

If you have significant debt and you are concerned that receiving an inheritance would simply mean handing all of those family assets over to your creditors, you might prefer to decline the inheritance and let other family members or friends who do not have creditor issues enjoy the new found wealth.

Sometimes an estate planning document might contain an error or an outdated provision.  Beneficiaries might choose to decline an inheritance entitled by an outdated document in order to allow the inheritance to go to the intended recipient.

Some estate plans build in provisions to provide alternate dispositions in the event that a beneficiary declines a gift.  This type of planning can create substantial flexibility which can navigate changes in the law or changes in a beneficiary’s circumstances.  

Saying “no thank you” to an inheritance is referred to as a “disclaimer.”  If a disclaimer is “qualified,” then the person declining the inheritance can do so without any adverse tax consequences.  Both federal and state law recognize “qualified disclaimers” under certain circumstances.

With regard to a federally recognized disclaimer, Internal Revenue Code Section 2518 provides the following conditions:

“(a) General rule

For purposes of this subtitle, if a person makes a qualified disclaimer with respect to any interest in property, this subtitle shall apply with respect to such interest as if the interest had never been transferred to such person.

(b) Qualified disclaimer defined.   For purposes of subsection (a), the term “qualified disclaimer” means an irrevocable and unqualified refusal by a person to accept an interest in property but only if—

(1) such refusal is in writing,

(2) such writing is received by the transferor of the interest, his legal representative, or the holder of the legal title to the property to which the interest relates not later than the date which is 9 months after the later of—

(A) the day on which the transfer creating the interest in such person is made, or

(B) the day on which such person attains age 21,

(3) such person has not accepted the interest or any of its benefits, and

(4) as a result of such 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.”

California law has similar provisions and expressly provides that if a disclaimer is qualified under federal law, it is also qualified under state law.

Being aware of disclaimers and their different applications can be effective in improving or protecting a beneficiary in a variety of circumstances.  

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney-client relationship.  Before acting upon any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.