"Disclaimer" is the legal term for a refusal of an inheritance, and it's defined as an irrevocable and unqualified refusal to accept an interest in property. Let's look at the circumstances in which a disclaimer can be beneficial:

To avoid or reduce estate, gift and income taxes. Some states have estate or inheritance taxes applicable to estates of a much lower value than the substantial amounts excluded from federal estate taxes.

  1. If your estate is expected to be subject to 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 are.
  2. If your inheritance is an asset that produces income — an IRA, perhaps — that will likely shift you into a higher tax bracket. In that case, a disclaimer may be just the thing — especially if you don't need the extra income. Again, the next beneficiary in line may benefit and be in a lower tax bracket.

While the disclaimer concept seems simple and straightforward, there are significant differences between the requirements for a disclaimer under state law and under federal tax law. For a qualified disclaimer under federal tax law, the disclaimer must be:

  1. Written;
  2. Made within 9 months of the decedent’s death, and
  3. The disclaimant cannot receive any benefits from the asset disclaimed.

To retain eligibility for certain benefit programs. Would the inheritance jeopardize your eligibility for certain government benefits at some future time? A disclaimer is usually ineffective to enable qualifications for needs based governmental benefits such as Medi-Cal or Supplemental Social Security Income (SSI).

  1. You should know, though, that for some benefit programs, an effective disclaimer must occur several years before you apply for aid.
  2. Most government benefit programs won't allow you to disclaim an inheritance.
  3. Consider state laws as well.

To allow the inheritance to pass to another beneficiary. If you don't need an inheritance but the next beneficiary does, a disclaimer would work nicely — and with minimal expense or hassle. It will not be counted as a gift from you, so you won't have to worry about a gift tax, either.

A disclaimer can correct uneven inheritances: It looked to your parents that you and your sibling were getting equal inheritances, but your part increased in value and your sibling's part decreased significantly.

  1. You can disclaim all or part of your inheritance to help realize your parents' original intention.
  2. Know, too, that as the person disclaiming a part of an inheritance, you have 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 will or trust. If there's no will or trust, it's the person specified in state intestacy law.

To protect assets. Wills can be designed to allow the surviving spouse to disclaim assets, which are then moved into a protected trust for the surviving spouse. This allows the survivor and heirs to benefit from the assets but have them sheltered from future creditors or remarriages.

Some aspects of disclaimers are governed by federal tax law and others by state property law. A qualified disclaimer under federal law comes with multiple requirements, while state law controls which types of property can be disclaimed and the requirements for a valid disclaimer. Some state laws mirror federal tax law, while others have different requirements.

The bottom line? Don't make a decision on a disclaimer lightly. Give us a call, and we'll help determine whether a disclaimer will benefit you and assist in avoiding any pitfall.

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