Although it is counterintuitive, one or more of your beneficiaries may wish to decline part or all of the inheritance left to them. Refusing to receive an inheritance is often referred to as “disclaiming” it. Under federal law, a beneficiary has the legal right to disclaim or refuse all or any part of a gift. In the event that a beneficiary disclaims property, an alternate or residual beneficiary will inherit the property.
There are a few common reasons why a beneficiary may desire to disclaim an inheritance. The most common one is to reduce their individual or family’s overall estate tax burden. Alternatively, some beneficiaries may wish that the property will pass to needier, contingent beneficiaries.
Disclaimers may also reduce or eliminate estate and gift taxes because any property disclaimed by a beneficiary is construed have never been legally owned by that person. As such, the property cannot be included in the beneficiary’s taxable estate upon death. Similarly, the person who disclaims a gift is not assessed a gift tax because the he never owned it.
Disclaimers are particularly useful when a primary beneficiary already has a large estate, and receipt of the property may add significantly to his or her taxable estate. However, if the alternate beneficiary has much less wealth, then the overall estate tax most likely will be reduced.
Disclaiming property is an important decision that could have significant tax implications on an estate. A meeting with an experienced estate planning attorney to discuss the situation and potential options most often proves extremely helpful.
Todd C. Ratner, Esq.