Maybe, or maybe not.
Your wildest dreams are coming true—a distant relative has died and named you in the will. However, once you consider the bequest, you decide to turn it down.
Have you lost your mind?
According to a recent article from The Street, titled “Why You Might Want to Refuse That Inheritance,” ... not necessarily.
There are several reasons for an heir to disclaim or say “no” to an inheritance.
In many cases, a "disclaimer" can redirect an inheritance within the family to a more tax-efficient recipient.
For instance, a gift might bump your own estate over the federal estate tax limit of $5.45 million for an individual or $10.9 million for a couple.
[Spoiler alert: Yesterday, at the Salvation Army's "Annual Charitable Gift Planning Conference," one of the presenters said the exemption is increasing to $5.49 million in 2017.]
So, if a named beneficiary would likely incur estate taxes on the inherited amount at his or her death, a smart move would be to save on taxes and disclaim an inheritance to a child with a smaller estate.
Another use of disclaiming is to redirect assets to a member of the family who needs the money more than the original beneficiary.
Children who are financially secure may want to disclaim assets they were to receive in a parent’s will to allow those assets to help support a surviving parent.
Similarly, when a person passes away without a will, the laws of intestate succession in many states distribute half of the estate to the surviving spouse and half to children—but that may leave the surviving spouse short on funds.
As a result, when it is time to settle the estate, a child can use a disclaimer to return a portion to the surviving parent.
Note: When you disclaim an inheritance, you cannot then direct where it passes. The disclaimed inheritance will pass according to the estate plan of the person leaving you the inheritance as if you had actually died before them.
Consequently, careful "upstream" estate planning must be done to avoid unintended inheritance surprises.
In addition to disclaiming by wealthy families to reduce estate taxes, less-affluent families may also see its application when a beneficiary has creditors who might try to claim inherited assets. It may be smart to direct those assets elsewhere. However, be sure to make sure this does not create more legal problems as a fraud on creditors.
Disclaiming may also help elderly family members who need nursing home care that Medicare does not cover.
Medicaid pays for long-term care—but only when recipients have exhausted nearly all of their own assets.
One idea is to spend down a nursing home resident’s assets so he or she can qualify for Medicaid. In addition, claiming an inheritance may delay when Medicaid starts paying for long-term care.
Disclaiming could protect an inheritance from being consumed by nursing costs and keep it in the family. However, disclaiming may not always be possible—if an heir is already on Medicaid, the state-run health program will likely contest an attempt to disclaim an inheritance that—if claimed—would make the individual ineligible for Medicaid.
There is a time limit when it comes to disclaimers.
You have nine months after death to disclaim the inheritance; however, you cannot benefit from the assets prior to disclaiming or thereafter.
The beneficiary must notify the estate executor in writing about the intent to disclaim via registered or certified mail. Be sure that disclaiming your inheritance is what you want to do because there are no mulligans.
An estate planning attorney can help you safely navigate these rather fast currents.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: The Street (August 30, 2016) “Why You Might Want to Refuse That Inheritance”