UPDATED: December 17, 2019
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When someone leaves you an inheritance, your immediate inclination may be to accept the gift, but some estate planning experts advise that, in some circumstances, disclaiming all or part of an inheritance is a wise move. When someone disclaims an inheritance, they refuse to accept all or part of it, whether it is money, real or personal property.
Under the right circumstances, a disclaimer can result in substantial federal estate tax savings. For example, if your parents leave you a substantial sum and you don’t need the money, you can file a qualified disclaimer and the money might go directly to your children if they are named in the will as contingent beneficiaries. The disclaimed portion will not count against your lifetime gift-tax exemption or your estate tax exemption.
Estate planners list several reasons for using a disclaimer:
- If you are wealthy, an inheritance could mean your own estate will end up paying additional federal estate taxes when you die, due to the increase in your estate’s value. By disclaiming the inheritance, you can shift that inheritance to another person, perhaps to your children, but only if the decedent's estate plan specified that if the original heir dies before the decedent, the inheritance would go to the children.
A disclaimer has the same effect as the death of the beneficiary. For example, if Joe is already fairly wealthy and his brother Tom leaves him another $2 million in his will increasing the size of Joe’s estate, Joe’s estate may owe substantially more in estate tax when he dies. If Tom’s will indicates that Joe’s children get that $2 million if they survive Joe, Joe can disclaim the inheritance from Tom now and that money will go directly to Joe’s children rather than passing through Joe’s estate.
- A disclaimer can be used to correct problems with estate plans. For example, if the deceased makes the mistake of bequeathing his or her assets to someone other than his or her surviving spouse, the estate cannot take advantage of the marital deduction and federal estate taxes are due.
The marital deduction is one of the primary deductions for married decedents. All property that is included in the gross estate and passes to the surviving spouse is eligible for this deduction. A disclaimer can be used in some cases, to transfer the assets to the surviving spouse, allowing the estate to take advantage of the marital deduction. Or, taking a different approach, all of the beneficiaries can disclaim their inheritances, causing the estate to be distributed intestate, as if there were no will, and thus, to the surviving spouse. In this way, the marital deduction is preserved, though it may be hard to get all beneficiaries to agree to this.
- Having the initial beneficiary of a trust disclaim the benefits can accelerate distributions to remainder beneficiaries. For example, Sue, a well-off surgeon, is the beneficiary of a trust created by her Uncle Fred’s will. The trust provides Sue with income until she dies, with the remainder going to the American Cancer Society upon her death. If Sue doesn’t need the money, she can disclaim the income from the trust, thereby accelerating the gift to the charitable organization.
In order to be valid, a disclaimer must be in writing, be an irrevocable and unqualified refusal to accept an interest in the asset, and must be delivered to the executor within nine months from the date of death. In addition, the person signing the disclaimer must not have accepted any part of the asset, or any benefit from the asset, such as rent, dividends or interest, and the person signing the disclaimer cannot direct the interest in the property to another recipient. The decedent’s will or estate plan must determine to whom the property passes, and if no will or estate plan exists, the state’s intestacy laws will determine to whom the property will pass. (Click here for information on who recieves property if there is no will).
In the will, the person leaving the money must name a secondary beneficiary who would get the assets if you disclaim them. A beneficiary cannot direct where the disclaimed property goes. So if you are thinking of disclaiming an inheritance from your parents, talk to them when the will is drawn to be sure a secondary beneficiary is named. You can always change your mind later and keep all or part of your inheritance.
Some heirs have used a disclaimer to beat creditors, and it has worked in some instances. In a Virginia case, Abbot v. willy, 479 S.E. 2d 528 (Va. 1997), Kathleen willey successfully disclaimed her interest in life insurance proceeds and avoided creditor attack. The Virginia Supreme Court determined that Ms. willey, whose creditors were seeking payment of valid claims against her that predated the death of her husband, could effectively disclaim $350,845.92 of life insurance proceeds. The court permitted the disclaimed proceeds to be paid to her children, who received the money free and clear of any interest of their mother’s creditors. The children were free to use the money as they wished, even to support their mother!
Keep in mind that the rules governing disclaimers are extremely complex. Be sure to seek the advice of an estate attorney if you are considering this option.