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Sometimes It's Better to Say No to Inherited Property
An individual who inherits property is not obligated to accept the property. In fact, it may be detrimental to accept gifted property.
The law allows you to indicate your desire not to accept such a gift by filing a "disclaimer." There are complicated federal tax rules and state laws governing your right to disclaim property you are given. There are both tax and non-tax reasons to disclaim. If a "qualified" disclaimer is properly made in accordance with Section 2518 of the Internal Revenue Code, the property is treated as if it had never been transferred to the person making the disclaimer. Regardless of state law, for a disclaimer to be qualified under Section 2518, it must be in writing, delivered within nine months of the transfer, and before the person disclaiming accepts any benefit from the property. A disclaimer allows the property to pass by operation of law and not as directed in the disclaimer.
As an example of when a disclaimer might be best to do, consider Fred's case. Fred has a $2 million estate and is married to his second wife, Sally, who has her own $1 million. Fred has a simple will, leaving everything to Sally, and if Sally is not living then to his two children equally, and to the lineal descendants of any deceased child. He dies this year and is survived by Sally. Sally will now have an estate of $3 million.
When Sally dies, her $3 million estate will incur an estate tax liability of around $675,000. If she disclaims $1.5 million, it will pass under Fred's will to his two children equally without tax. Should Sally die this year, after making the disclaimer, her estate of $1.5 million will incur no estate tax. Thus, the disclaimer SAVED $675,000!
In addition to correcting this lack of proper estate planning, a disclaimer can correct unanticipated problems from even good estate planning. For example, if one of Fred's children, Sam, were wealthier than even Fred realized - because often parents do not discuss their estate planning with their children - Sam's receipt of $750,000 added to his existing taxable estate will generate an estate tax of around $337,500, when the funds go to Sam's two adult children. By doing a disclaimer Sam's children would receive their share of this $750,000 directly from Fred's estate without incurring any gift tax.
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