Procedures for Disclaiming an IRA Inheritance

A beneficiary can disclaim an IRA inheritance if he does not want all or part of the IRA. A beneficiary may want to disclaim if he is already wealthy and the next eligible beneficiary could benefit more from the inheritance, or if he is facing personal bankruptcy and would likely lose the inheritance in any case. After a beneficiary disclaims his inheritance, he will be treated as never owning any of the inheritance, and the IRA will not be included in his estate. The proper procedure must be followed to ensure a disclaimer is valid.

In order to disclaim, the beneficiary must not have benefited from any proceeds of the disclaimed property. With an IRA, required minimum distributions are given to the owner of the IRA. The primary beneficiary must receive these distributions if the account holder died. If the beneficiary receives a distribution, the beneficiary has benefited from the IRA. The IRS has created one exception: if a minimum distribution is paid to the primary beneficiary before the beneficiary has decided to disclaim the IRA, the beneficiary will not be considered as having benefited from the IRA. The beneficiary can still disclaim the IRA after receiving a minimum distribution in the year of death.

Read More: Inherited IRA Vs. Beneficiary IRA

A beneficiary has the option of disclaiming a percentage of an IRA and keeping some of it. The beneficiary disclaims any income from the disclaimed portion of the IRA. The beneficiary accounts for any gains or losses associated with the portion of the IRA he wants to keep. The disclaimed portion of the IRA passes to the contingent beneficiary. An IRA owner should name a beneficiary and a contingent beneficiary in the IRA account. If the primary beneficiary disclaims and the IRA owner did not name a contingent beneficiary, the IRA will be distributed according to the IRA owner's will.

A disclaimer must be made in writing. You can find sample forms for an inheritance disclaimer online or from a financial services company, or you can create your own form that explains the extent of the disclaimer, states the IRA to be disclaimed, and names the state where the disclaimer takes place. There is not one standard form that must be used. The written disclaimer needs to be notarized. A written disclaimer is irrevocable, which means when a beneficiary disclaims an IRA she cannot change her mind a few months later in hopes of reclaiming those assets.

A beneficiary must disclaim an IRA within nine months of the IRA owner's death and deliver the disclaimer to the administrator of the estate. The administrator should either sign and date the disclaimer form or sign another form to show that he received the disclaimer before the deadline. The disclaimer does not need to be submitted to the IRS. The nine-month deadline is a federal requirement, so a disclaimer must be made within nine months for federal tax purposes. State law dictates to whom a written disclaimer must be submitted. Some states require the disclaimer to be submitted to the state's department of revenue or to the estate's trustee. The disclaimer likely does not have to be submitted to a probate court, because an IRA is a non-probate asset.