If you’re about to receive an inheritance, you might consider
rejecting it.
If you’re about to receive an inheritance, you might consider rejecting it. This estate-planning strategy, called a “disclaimer,” seems to defy common sense, but it can actually make good financial and tax-planning sense.
Consider the example of Jane and Joe. Joe recently passed away, leaving his entire estate to Jane. Jane decided that she could live comfortably without receiving Joe’s entire estate, so she disclaimed $100,000, which then passed directly to her daughter as the “contingent beneficiary” of Joe’s will. The $100,000 wasn’t taxed in Joe’s estate, and it is now out of Jane’s estate as well.
This results in future tax savings for Jane’s estate – as much as $50,000 for 2002, depending on the size of her estate.
In effect, disclaimers allow heirs to do tax planning after someone has died. Disclaimers can be especially useful in the case of retirement accounts, because funds can stay in these income-tax-deferred accounts longer, when left to younger beneficiaries.
A disclaimer can be a very useful tool, but you must follow IRS requirements exactly. To be effective, a disclaimer must be written, irrevocable, and unqualified. Generally, a disclaimer must be delivered to the executor of the estate within nine months of the date of death. Prior to disclaiming property, you must not receive any benefits from it, such as interest income or dividends.
Disclaimed property will go back into the decedent’s estate and pass to the contingent beneficiary as if you were no longer alive. You will have no control where it goes. Therefore, before you disclaim you should know whom the decedent has named as contingent beneficiary and you should want this person to receive the property.
Disclaimers should be done with the assistance of your attorney. If you have questions about the tax implications of a disclaimer, contact our office.
Kerry Lorincz is a CPA and partner with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister.
