It sounds counterintuitive, but there are times when the smartest move is to refuse, or “disclaim,” an inheritance. In the right circumstances, a disclaimer can protect you from creditors, correct an outdated estate plan, or even minimize taxes for the next generation.
Debt and creditor issues are a common reason to say no. Inherited assets are generally not shielded from your creditors, so if you carry significant debt, what you inherit may vanish to satisfy claims. By stepping aside and allowing assets to pass to the contingent beneficiary, you can keep those assets out of creditors’ reach.
Disclaimers can also fix fairness problems when a loved one’s estate plan is out of date. For example, if parents previously made a large lifetime gift to one child but never adjusted their plan, that child can disclaim all or part of the inheritance to balance things out. In one illustration, parents gifted a $1 million home to their son and later left $2 million to be split between him and his sister. By disclaiming $500,000 of his share, the son ends up with $1.5 million total ($1 million home plus $500,000 cash) and the sister also receives $1.5 million, aligning the outcome with the family’s sense of fairness.
Sometimes, refusing an inheritance is a tax-savvy move. Beneficiaries who do not need the funds may disclaim so assets pass down to children, potentially reducing overall estate and gift tax exposure. Consider this scenario: a person with $10 million is slated to receive another $10 million from a relative. If he accepts it and dies with $20 million, a 40% estate tax could reduce what ultimately passes to his children. If he instead disclaims the $10 million, those funds pass directly to his children, and no additional estate tax is due at his death, leaving each child better off than if he had accepted the inheritance first.
If you are considering a disclaimer, timing and formality are critical. Disclaimers must meet strict statutory and deadline requirements to achieve the intended legal and tax results, and once made, they cannot be revoked. Talk with an experienced estate planning attorney before you act to ensure your disclaimer is valid and truly advances your family’s goals.
If you would like to learn more, or set up a complimentary estate planning consultation with one of our Madison, Wisconsin estate planning attorneys, please contact us and we can schedule a time to meet.