How to Disclaim an Inheritance (And Why You Would)

By Rebecca Lake

Receiving an inheritance can provide a financial windfall, but there are some scenarios where you may prefer not to receive one. In that case, you might be wondering if it’s possible to decline an inheritance and the responsibilities that go with it. In fact, the answer is yes – it is possible to “disclaim” inheritance rights and have the assets you were supposed to inherit distributed differently. Doing so starts with understanding the legal process and rules involved. We’ll go over the basics of disclaiming an inheritance, and discuss why you might want to do so.

First, it’s important to understand what disclaiming an inheritance means. In a nutshell, it means you’re refusing any assets that you stand to inherit under the terms of someone’s will, a trust or, in the case of a person who dies intestate, the inheritance laws of your state. You can also disclaim an inheritance if you’re the named beneficiary of a financial account or instrument, such as an individual retirement account, 401(k) or life insurance policy.

Disclaiming means that you give up your rights to receive the inheritance. If you choose to do so, whatever assets you were meant to receive would be passed along to the next beneficiary in line.

It’s not typical for people to disclaim inheritance assets. And while it may seem strange to do so, there are some instances where it might be preferable for an heir or beneficiary to turn down an inheritance.

There are no specific rules for when you can or can’t disclaim an inheritance; it’s more a matter of personal choice. With that in mind, you may choose to refuse an inheritance for any of the following reasons:

• You’d rather have someone else, such as a sibling, child or charity, inherit the assets that were intended to go to you instead and you want a workaround for paying gift tax.
• Inheriting assets would increase the size of your estate and potentially create tax planning complications for your own heirs once it’s time to pass your assets on.
• Accepting certain assets, such as money held in an IRA, would push you into a higher tax bracket and you’d rather avoid getting stuck with a large tax bill.
• Allowing the inheritance to pass to someone else would allow for the wishes of the deceased person to be more accurately fulfilled.
• Receiving an inheritance would affect your ability to qualify for certain types of federal benefits, such as student loans or Medicaid.
• You just don’t need the inheritance because you’re financially stable and would rather someone else benefit from it.

Those are all valid reasons to disclaim inheritance, but in some instances it may come down to simply not wanting whatever it is you’re supposed to inherit.

Say, for example, a relative leaves you their home, which is in need of extensive repairs or has expensive property taxes. If their will stipulates that you can’t sell the property and renting it out isn’t an option, then disclaiming it may be the best choice for shifting the financial burden of owning it to someone else.

If you feel that refusing an inheritance is the right thing to do, for whatever reason, you need to know what’s required to do so. First, there are certain guidelines you need to follow to satisfy the IRS and ensure that you’ve properly disclaimed an inheritance. Specifically, the IRS requires that:

• You make your disclaimer in writing.
• Your inheritance disclaimer specifically says that you refuse to accept the assets in question and that this refusal is irrevocable, meaning it can’t be changed.
• You disclaim the assets within nine months of the death of the person you inherited them from. (Note: There’s an exception for minor beneficiaries; they have until nine months after they reach the age of majority to disclaim.)
• You receive no benefits from the proceeds of the assets you’re disclaiming.
• The assets you disclaim don’t pass to you in any way, either directly or indirectly.

Aside from that, you also have to follow any guidelines set by your state to disclaim an inheritance. For example, your state might require that a disclaimer be notarized or witnessed, filed with the probate court or shared with the executor of the deceased person’s estate or the trustee in charge of distributing assets from a trust.

It’s very important to note one thing about disclaiming an inheritance: you don’t get to decide what happens to it.

Once you sign off on a refusal to inherit, the assets you would have received are passed on to the next person in line. That’s important to remember if you plan to disclaim an inheritance so that your child or another family member can receive it instead. Unless they’re the next beneficiary or heir on the list, there’s no guarantee that the assets will go to them.

And if you’re considering disclaiming assets you should consider how that may impact the person who will receive them. Say, for example, that the next beneficiary after you is a family member with special needs. If you’re passing on a large inheritance to them because you’ve refused it, that could affect their ability to continue receiving Medicaid, disability or other government benefits.

It’s also important to keep in mind that disclaiming an inheritance is permanent. If you change your mind down the line and decide you do want the assets you would have inherited, you can’t reverse your original disclaimer.

But you could avoid disclaimer’s remorse by only refusing part of an inheritance. There’s no rule that says you have to disclaim all of the assets you’re entitled to receive as an inheritor. So if a family member names you the beneficiary of their IRA, for example, and also wills their home to you, you could choose to keep the money from the IRA and let someone else have the house.

Disclaiming an inheritance isn’t something you might automatically choose to do, but it’s good to know the option exists if receiving an inheritance isn’t right for you. The most important thing is to understand what you’re giving up and how to disclaim assets properly so there are no questions or conflicts later. Talking to an estate planning attorney can help you decide whether it makes sense to disclaim and understand how to do it properly based on the laws in your state.

• If you’re in line to receive an inheritance, it’s a good idea to speak with a financial advisor who can help you understand the financial and tax implications. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready to get connected to an advisor, get started now.
• If you stand to receive an inheritance, consider how it may fit within your larger financial plan and what kind of tax implications you could face. Inheriting an IRA, for example, can help you add to your retirement savings but it can trigger tax liabilities that you need to be prepared for. It may also be a good idea to review your own estate plan if you stand to inherit from someone else to determine how it could affect your estate and gift tax planning.

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The post How to Disclaim an Inheritance (And Why You Would) appeared first on SmartAsset Blog.

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