Do I Have to Accept an Inheritance?

If you do not want to accept an inheritance, you have to disclaim. For most, this is not often done because they are not able to disclaim an item in the hopes that they can chose a comparable item. More importantly, they cannot direct or decide who gets their disclaimed asset.

MarketWatch’s recent article entitled “Can I reject an inheritance?” explains that the details about disclaiming are provided in section 2518 of the U.S. Tax Code. Since wading through the tax code can be arduous for most, here are some of the basics about disclaimers.

In most states, a qualified disclaimer must be filed within nine months of an asset owner’s death. This disclaimer is irrevocable. Therefore, once it’s done, it’s done. This can create problems with IRAs because they have beneficiary designations, and the death claim can be processed with a few forms. As soon as the funds are transferred to an inherited IRA, disclaiming is no longer an option.

When a person disclaims an asset, the asset is distributed as though that beneficiary had died prior to the date of the benefactor’s death. Therefore, with an IRA, it is pretty simple. If you disclaim all or a part of the IRA, the funds pass to the alternate beneficiaries designated by the decedent. Depending upon who has been named secondary or tertiary beneficiary(ies), the asset may or may not passed to the disclaiming individual’s children.

The IRA usually has a secondary beneficiary named. If the beneficiaries in line to inherit the account are who you would want to inherit the account, disclaiming should transfer the account to them. However, if they’re not who you want to get the funds, you have little leverage to do anything about it.

If there are no other beneficiaries and you disclaimed, the money goes back into the decedent’s estate.

The funds would go through probate and be directed based upon his will. If there was no will (intestacy), the probate laws of the decedent’s state will dictate how the assets are distributed.

Having an IRA, or other assets, go through the Lasts Will and Testament and the estate, because an asset has been disclaimed and there are no alternative beneficiaries, is inefficient. It is time consuming and adds additional costs beyond the potential tax liabilities.

All these drawbacks can be avoided by properly designating alternate beneficiaries and reviewing your beneficiary designations periodically to ensure that they are in line with the overall design our estate plan and that the individual(s) or members of a certain class are properly identified. For example, if your plan is to leave your assets to your children as secondary or alternate beneficiaries and you have a new baby, then you want to make sure that all of your children are identified on the form. Also, if your beneficiary is your former spouse, after a divorce, you need to update the forms to prevent a former spouse from inheriting your assets if that inheritance was not part of a divorce settlement agreement.

Proving some thought into “what if” scenarios is also advisable. For example, if you anticipate that a family member, for example, a successful adult child, may disclaim, you can set up beneficiary designations to purposely give an inheritor the option to disclaim to other family members who are in greater need of funds or in a lower tax bracket.

Reference: MarketWatch (Aug. 25, 2020) “Can I reject an inheritance?”