Now What Do I Do?
Not every inheritance is welcome or wanted, strange as it seems. There are tax issues, potential lawsuits looming, or even just a desire to see the inheritance go somewhere else. However, there are different ways people believe they can waive off an inheritance, and not all are equal or effective. We’ll review the top ways people inherit assets, review what happens when they don’t want that inheritance, and then finally review specific steps from a federal standpoint on how to “disclaim” an inheritance.
One of the top ways people believe they are passing along their homes in an efficient manner is by “putting their kids’ names on” the deed to their property as “joint with a right of survivorship” in order to avoid probate. Unfortunately, this comes with a host of tax, Medicaid, and lawsuit liability implications that people don’t want for their kids, but, unfortunately, these downsides are not widely known. About a year ago I did a whole video on this topic called “The Joint Property Tax Trap,” and it is available on YouTube here:
Unfortunately, when someone is a joint owner of real estate, or any other asset for that matter, they are not able to refuse to inherit the additional portion when someone dies. When we get to the requirements to “disclaim” an inheritance you’ll understand why.
Another way of inheriting assets is through beneficiary designations on retirement accounts, life insurance, and other investment accounts. This is another way to avoid probate when someone passes on since, by contract, the account goes to the named beneficiaries without probate. An unfortunate side effect of this method of inheriting is that because it bypasses probate that it also bypasses any age and other restrictions in a Last Will and Testament.
For example, if you name your two children, ages 18 and 20, as beneficiaries on your life insurance, but you put an age restriction of 30 on inheritances in your Last Will and Testament, then that life insurance would go to those children immediately upon death. This is because a Will only covers probate assets, and since the beneficiary designation avoided probate, those restrictions in a Will are not honored.
But can an inheritance by beneficiary designation be refused? The answer is a qualified yes. Again, you’ll see later that there are specific circumstances that need to be met in order to disclaim the inheritance, and it is certainly not something you can sit on and contemplate.
Finally, there is inheritance through a Last Will and Testament or Revocable Living Trust (as well as other kinds of trusts). Whether an inheritance is coming through a Will or Trust, an inheritance can be refused with the correct process. When we review that process, you’ll see there are specific consequences and contingencies for that inheritance, but one thing that is different is that in a Will or Trust, you can specifically draft provisions regarding what would happen to an inheritance if it is disclaimed that could be different than what happens under the legal defaults.
So what can you do, or what can’t you do, when it comes to refusing an inheritance? Here is where we have a lot of widespread misconceptions and assumptions.
- When you disclaim an inheritance, you can’t direct where the inheritance goes. A legal disclaimer simply treats you as if you died before the deceased person. In the case of a deceased person with three children who left their account to them “equally per stirpes,” this means that if a child disclaims their inheritance, then it would go to their children, meaning those grandchildren of the deceased person, equally. They cannot disclaim the inheritance and then say they want it to go to their cousin Tony.
- A Will or Trust can, but often doesn’t, specifically address that if someone disclaims an inheritance then the inheritance goes to certain beneficiaries, but that if the person dies first then it would go to other beneficiaries. In other words, the Will or Trust could give that inheritance to cousin Tony if there is a disclaimer versus to the grandchildren should they die beforehand.
- If you disclaim an inheritance by beneficiary designation and it would go to younger beneficiaries, you cannot say it only goes to those younger beneficiaries at a certain age. It goes according to the terms of the account contract, Will, or Trust.
- They can always accept the inheritance, deal with whatever tax consequences there are, if any, and then give the inheritance to whomever they want. Of course, if the amount gifted exceeds the annual exemption for gift taxes (currently $18,000 per year per individual), then a gift tax form needs to be filed.
When it comes to inheritances and what happens to an inheritance when someone doesn’t want it, there is one key understanding you need to keep in mind. The inheritance is happening because of the planning (or lack of planning) from the person who passed on. It is their estate plan. Whatever contingencies they have within their plan become effective if you refuse to take the inheritance. You only get a say in what happens to that inheritance if you accept it as your own, and then you can do whatever you want with it.
So how do you disclaim an inheritance? There are different procedures under different state laws, but here is federally how an inheritance is disclaimed with the Department of Revenue.
- Make a disclaimer in writing
- Your inheritance disclaimer specifically states that you refuse to accept the assets in question and that this refusal is irrevocable and cannot be changed
- You are disclaiming the assets within 9 months of the person dying that you are inheriting from (minors have 8 months from the date they reach the age of majority)
- You receive no benefit from the assets you are inheriting (accepting dividends from the stock, moved into the property, etc.)
- The assets disclaimed don’t pass to you in any manner, including indirectly
When all of these factors come together, you can effectively disclaim and reject an inheritance. Again, be sure to check state law regarding anything that might be required in your jurisdiction. For example, state statutes may require that to disclaim an inheritance under a Will the written statement be signed, notarized, and filed with the probate court.
There are many personal factors that lead someone to not want to take an inheritance. However, it has to be done the right way and the named beneficiary doesn’t usually get the option of choosing whomever they want to get the inheritance instead.