Why would anyone want to refuse an inheritance? Although it is surprising to many, there are several circumstances when declining an inheritance can be beneficial. The law does permit you to refuse an inheritance if you comply with certain strict requirements. The legal term for a refusal of an inheritance is a “disclaimer,” which is defined as an irrevocable and unqualified refusal to accept an interest in property.
When Is a Disclaimer Beneficial?
(1) Avoidance or reduction of estate, gift, and income taxes. In 2019, the federal estate tax exclusion amount is $11.4 million for an individual and $22.8 million for a married couple. This means that only estates that exceed this amount are subject to estate tax. Because most people do not such a sizable estate, using a disclaimer to avoid federal estate taxes is less common now than in the past. However, some states have estate or inheritance taxes applicable to estates of a much lower value. If your estate will be subject to those taxes, disclaiming an inheritance may make sense if the next beneficiary in line (as named in the will or under state intestacy law) is taxed at a lower rate than you.
In addition, a disclaimer provides a way for you to provide a gift to the next beneficiary in line without having to worry about the gift tax. If you decide to disclaim an inheritance, for tax purposes, it is considered to have never belonged to you. Obviously, you cannot make a gift of something that was never yours! As a result, it does not count towards your annual gift tax exclusion amount (in 2019, $15,000 for an individual and $30,000 for a married couple) or your lifetime exclusion amount of $11.4 million for an individual.
If your inheritance is an asset that produces income, such as an IRA, and it will likely shift you into a higher tax bracket, a disclaimer may be beneficial if you do not need the extra income. Of course, the next beneficiary in line will also benefit, especially if that person is in a lower tax bracket.
(2) Eligibility for certain benefit programs. If you are trying to qualify for certain government benefits at some point in the future and the inheritance would jeopardize your eligibility, disclaiming the inheritance may enable you to become eligible.
Warning: For some benefit programs, an effective disclaimer must occur several years before you apply for aid. Generally, government benefit programs will not allow you to disclaim an inheritance when you are already receiving aid in order to maintain your eligibility—or if you do disclaim an inheritance, you may be disqualified from receiving those benefits. Check with us to make sure that a disclaimer will not be viewed as invalid under state or federal law.
(3) Allowing the inheritance to pass to another beneficiary. If you do not need an inheritance and the next beneficiary in line does need it, a disclaimer can allow it to pass to that beneficiary with minimal expense or hassle. It will not be counted as a gift from you, so you will not have to worry about the gift tax.
A disclaimer can also be used as a way to correct uneven inheritances. For example, if a parent intended for his two children to receive inheritances of equal value, but one of the children receives an asset that has decreased significantly in value from the time the will was drafted, the child who received the inheritance of higher value can disclaim all or part of her inheritance to help realize the parent’s original intention. This strategy will only work if the person who received the smaller inheritance is the next beneficiary in line. It is important to keep in mind that the person who is disclaiming the inheritance has no control over who will receive the inheritance after the disclaimer: The identity of the next beneficiary in line is the person named in the deceased person’s will or trust, or if there is no will or trust, the person specified in the state intestacy law.
What Are the Requirements for a Qualified Disclaimer?
Some aspects of disclaimers are governed by federal tax law and others by state property law. Under federal tax law, which regulates how disclaimed property is treated for tax purposes, a “qualified disclaimer” must meet the following requirements:
- The disclaimer must be in writing;
- The writing must be delivered to the person controlling the property (usually the executor or trustee);
- The writing must be delivered within nine months after the interest was created or the disclaimant turns 21, whichever is later;
- The disclaimant must not have accepted the disclaimed interest or any of its benefits (except for a distribution from an inherited IRA under limited circumstances); and
- The property must pass without the direction of the disclaimant according to the decedent’s plan of distribution.
State law controls which types of property can be disclaimed as well as the requirements for a valid disclaimer.
Contact Us Today
Disclaiming an inheritance is a strategy that you may not have considered, but it may be able to help you achieve your estate planning and tax-saving goals. We can help you evaluate your individual circumstances to determine whether a disclaimer will benefit you, and we can assist you in avoiding any possible pitfalls. Give us a call today to set up a meeting.
No one enjoys thinking about their own funeral, but making those arrangements in advance yourself may be one of the most thoughtful acts you can do for your loved ones. More and more people are including funeral planning as part of their estate plan, sparing their grieving families from having to make hasty arrangements during an already stressful time. A Remembrance and Services Memorandum will allow you to specify who should be notified of your death, provide personal information that should be mentioned in your service or obituary, indicate how your remains should be handled, and describe your wishes for your memorial service or funeral. Some people also opt to prepay their funeral expenses.
Why Does It Need to Be Written Down?
Death is a subject that many people do not want to talk about with their families. Consequently, although you may think that your loved ones know what kind of funeral or memorial service you want (if you want one at all), whether you want a burial or cremation, or other information related to your funeral, there is a good chance they do not know what your specific wishes are. In addition to creating an additional burden for your loved ones during a stressful time, the failure to leave written instructions can set the stage for conflict between emotionally overwrought family members who may have differing points of view about what you would have wanted regarding the disposition of your remains and memorial service.
In many states, your survivors are legally obligated to comply with your written wishes about the disposition of your remains. However, if you do not record your wishes in writing, state law will determine who will make those decisions on your behalf. Your state law indicates the hierarchy of relatives who are legally entitled to make decisions about how to handle your service and the disposition of your remains. The typical order of the hierarchy is:
- Spouse
- Children
- Parents
- Next of kin
- Court-appointed public administrator
If you are estranged from the person designated by state law, or if you have two children who disagree about how your service should be handled, the resulting dispute could end up in court—the last thing grieving family members should have to face after you pass away.
In addition, even close family members may have values or religious convictions that are very different from your own. Completing a Remembrance and Services Memorandum can help ensure that your family members will not have to guess about what you want, avoiding this extra burden at a difficult time.
Why Shouldn’t I Just Include It in My Will or Trust?
Memorial or funeral services typically occur within a few days of a person’s passing, while your will or trust is not likely to be accessed or read until weeks or even months after your death. Wills and trusts are intended to deal with the distribution of your property, which is not as time sensitive as your funeral or memorial service and the disposition of your remains. The original version of your Remembrance and Services Memorandum can be provided in advance to your attorney, the executor of your will, or the trustee of your trust, with additional copies provided to your family members, avoiding confusion or disagreements between survivors who may think you expressed other wishes elsewhere or verbally.
Should I Prepay for My Funeral?
Funerals and related arrangements can be shockingly expensive. Prepaying for your service is an option that you can consider to help your grieving loved ones avoid incurring significant debt. Also, if you prepay for your funeral arrangements, you can comparison shop just as you would when making other large purchases, without any time constraints. This will benefit your family members, who may make rushed arrangements without time to consider the cost or may make an emotion-based decision to spend a large amount of money as a means of honoring you. In addition, you can pay for the arrangements at their current prices, which may represent a substantial savings if you pass away many years in the future. Planning in advance can also ensure that you can obtain a cemetery plot or mausoleum of your choice, rather than leaving family members to hurriedly select a site that they may not have time to visit in advance.
There are some potential downsides to prepaying for your arrangements, however. If there is a possibility that you may move in the future and want to have your service in another location, you should not bind yourself to a plan that cannot be canceled or transferred without substantial additional cost. Some larger cremation service providers and funeral homes have prepaid plans that will be honored nationwide, so be sure to do your research beforehand. You should also keep in mind that the funds you pay in advance for your arrangements will not be available to you for living expenses or emergencies. In addition, there is a risk that your funeral provider will close or mishandle your funds. We can help you verify that state law provides adequate protection for the funds you have prepaid—for example, by requiring some or all of the funds to be placed in a state-regulated trust.
Note: The Federal Trade Commission’s Funeral Rule guarantees certain rights to consumers. For example, consumers have the right to choose only goods and services they want rather than a package, to be given written or verbal price lists for items and services offered by funeral providers, to be provided itemized statements showing what they are purchasing and the price of each item or service, and to have the right to use a casket or urn purchased from a vendor other than their funeral provider.
Give Us a Call
Making arrangements for the disposition of your remains and your memorial service in advance can provide peace of mind for both you and your loved ones. We can help you memorialize your wishes in writing or update any pre-existing arrangements. Give us a call today to set up a meeting.
Posted in: Estate Planning, Gifting, Taxes