It’s the thing movies are made of: a distant relative who you met only once has made you the heir to his or her entire estate. You’ve got money and other assets coming your way—minus the emotional turmoil of losing a loved one. Still, you need to take a closer look, warns The Street in its article, “Why You Might Want to Refuse That Inheritance.” You may realize that sometimes it’s best that this scenario remains a fantasy.
There are several reasons for an heir to disclaim or say “no” to an inheritance. In many cases, it’s to redirect the money within the family to a more tax-efficient recipient. For instance, a gift might bump your own estate over the federal estate tax limit of $5.49 million for an individual or $10.98 million for a couple. When you reach this threshold, estates are hit with a 40% tax. If a named beneficiary would expect to incur estate taxes on his or her death, a smart move would be to save on taxes and disclaim an inheritance to a child with a smaller estate.
Another use of disclaiming is to redirect assets to a member of the family who needs the money more than the original beneficiary. Children who are financially secure may want to disclaim assets they were to receive in a parent’s estate plan to allow those assets to help support a surviving parent. When a person passes away without an estate plan in many states, half the estate goes to the surviving spouse and half to children—but that may leave the surviving spouse short on funds. As a result, when it is time to settle the estate, a child can use a disclaimer to return a portion to the surviving parent.
In addition to disclaiming by wealthy families to reduce estate taxes, less-affluent families may also see its application when a beneficiary has creditors who might try to claim inherited assets. It may be smart to direct those assets elsewhere.
This can also help elderly family members who need nursing home care that Medicare doesn’t cover. Medicaid pays for long-term care—but only when recipients have exhausted all of their own assets. One idea is to spend down a nursing home resident’s assets so he or she can qualify for Medicaid. In addition, claiming an inheritance may delay the timing of when Medicaid starts paying for long-term care. Disclaiming could protect an inheritance from being consumed by nursing costs and keep it in the family. However, disclaiming may not always be possible—if an heir is already on Medicaid, the state-run health program might contest an attempt to disclaim an inheritance that—if claimed—would make the individual ineligible for Medicaid.
A few final details: you have nine months after the person’s date of death to disclaim an inheritance, but it is best not to delay. Why? IRA custodians may cash out IRA accounts on their own initiative and mail checks to beneficiaries. If you cash one of those checks, it could make it difficult for you to disclaim. To disclaim, you may not benefit from the assets. Also, you must notify the estate executor about your intent to disclaim in writing and using registered or certified mail. Disclaiming an inheritance is one of those things that cannot be reversed, so think carefully and be sure this is really what you want to do.
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Reference: The Street (August 30, 2016) “Why You Might Want to Refuse That Inheritance”