While most of us would probably be excited to receive news of an inheritance, that is not the case for everyone. The reality is there may be certain situations where receiving an inheritance is not in your best interest. There are many different reasons this may be the case. So, you may find yourself wondering how to reject an inheritance. This can be an important part of inheritance planning.
The answer is yes, you can reject an inheritance. However, it is a bit more complicated than simply telling the executor you don’t want it. Certain rules must be followed if you want to ensure that you never legally become the owner of the property. First, the disclaimer must be put in writing and delivered to the person who is in control of the estate. That would typically be the personal representative or trustee. In most cases, the disclaimer should be completed within 9 months of the person’s death. The most important thing to remember is that you cannot accept any benefit from the property you are rejecting.
If one spouse dies, the surviving spouse can inherit the entire estate tax free, based on the unlimited marital deduction. However, once the inheritance is added to the surviving spouse’s estate, it may cause the surviving spouses' estate to exceed the lifetime credit of $5.45 million. Only estates that are valued under that amount can be passed on without incurring estate taxes. Any excess amount will be taxed at 40 percent. In this situation, it may be a smart choice to disclaim the inheritance from your deceased spouse, allowing it to pass directly to the next beneficiaries, typically your children. Before making this decision, discuss this with your estate planning attorney as part of your inheritance planning.
In some cases, the beneficiary of an inheritance may also be the recipient of state or federal benefit programs, such as Social Security or Medicaid – benefits programs that are based on income or need. In those situations, accepting an inheritance, depending on its size, could effectively disqualify the beneficiary from those benefits. It may be more important to that individual to preserve continue benefits, than to receive an inheritance.
Regardless of the reason you may need to disclaim an inheritance, it is essential that you discuss your decision with an estate planning attorney. They can help you to ensure that the disclaimer is handled properly, so you can avoid problems in the future. Inheritance planning requires consideration of your present and future financial goals. There are several steps for developing this plan, which you and your attorney can follow.
In addition to an inheritance plan, you need to have a tax plan as well. While an inheritance is not generally considered income for purposes of federal income taxes, subsequent earnings from the inherited taxes are. That means, you will be taxed on any interest paid on inherited cash in a bank account or dividends on inherited stocks or mutual funds. Also, any gains you have when you sell inherited investments or property are generally taxable. Luckily, you can claim losses on these sales as well.
If you have questions regarding inheritances, or any other inheritance planning issues, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.