Under normal circumstances, beneficiaries are more than eager to collect their inheritance. In some circumstances, however, it can be advantageous for a beneficiary to actually refuse her inheritance. The refusal of an inheritance, often referred to as a “disclaimer,” was not permitted traditionally, but modern law does not force a person to accept a gift she does not want in most circumstances. As with all types of property, a beneficiary may choose to disclaim all or a portion of the proceeds from an IRA, but the beneficiary must decide whether to do so before accepting the money.
Reasons for Disclaiming
A disclaimer can provide a means by which a person who is morally opposed to benefiting from someone’s death can refuse the money. A beneficiary may also want to consider refusing the money if she is concerned that the beneficiary’s creditors may seize the funds. Some states, however, do not permit a beneficiary to refuse an inheritance if the purpose of the refusal is to prevent the beneficiary’s creditors from ultimately receiving the money. A disclaimer is never permitted if the purpose is to avoid a federal tax lien. Perhaps the most common reason for a beneficiary to refuse the proceeds from an IRA is to avoid gift and estate taxes.
Avoiding Gift and Estate Taxes
Gift tax is an issue for transfers of property during the lifetime of the person making the gift. Although gift tax is usually thought of as a federal tax, some states impose their own gift tax in addition to the federal tax. Unlike gift tax, which imposes a tax on lifetime transfers, estate tax is imposed on the value of a deceased person’s property that exceeds a specified amount at the time of the property owner’s death. A disclaimer may avoid these taxes.
Example of Tax Avoidance
Assume that a father names his adult daughter as the beneficiary of his IRA, and that if she dies before her father, her son stands to inherit the money. Assume also that the daughter is well-off financially, but her son could use some money to start a new business. If the daughter accepted the IRA money and then gave the money to her son, gift tax may be an issue. If the daughter accepted the money but died before giving it to her son, estate tax may be an issue. If the daughter instead refuses to accept the IRA money, the money would instead be distributed to her son without any adverse tax consequences.
Distribution of Disclaimed Property
When a person refuses to accept an inheritance, the law usually treats her as having died before the person who owned the inheritance property. From the above example, because the account holder’s daughter disclaimed the proceeds of the IRA, she was treated as having died before her father. Because the daughter’s son would stand to inherit the IRA should his mother not survive, the son inherited his grandfather’s property. It is important to note that because the beneficiary is treated as having died before the IRA account holder, she cannot determine who then receives the inheritance.
The means by which you can properly refuse to accept an inheritance is governed by federal and state law, and variation does exist among the states. Generally, your refusal to accept the property must be in writing and delivered to the administrator of the disclaimed property. The disclaimer must be unconditional, meaning that you cannot have received something in exchange for refusing to accept the property.
You must file the disclaimer on time with the proper authorities as determined under state and federal laws. Federal laws, and some states, require you to file the disclaimer within nine months of the date of death. Other states instead provide that you have nine months from the date you learned of the inheritance to file the disclaimer. A few states do not impose any time restriction.
- Examples and Explanations: Wills, Trusts, and Estates (3rd Edition); Gerry Beyer
- Guide to Wills and Estates (Third Edition); The American Bar Association
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