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A beneficiary disclaiming an inheritance by crossing his arms in front of the executor of the estate.

Disclaiming an inheritance: Can you legally refuse it?

by Curtis Lee | Contributor
October 25, 2022

If you're set to receive an inheritance, there could be financial, practical or personal reasons for refusing it. If you decide to disclaim an inheritance, the law will generally proceed as if you died before the event leading to the inheritance took place.

When most people learn that they're about to receive an inheritance, they feel it's a good thing. They might be expecting a financial windfall or a priceless family heirloom that's cherished by almost everyone in the family. But in certain situations, a beneficiary won't want an inheritance they have coming to them. Why might this be? And is it possible to disclaim an inheritance?

Can you refuse an inheritance?

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You can decline an inheritance, and the process is called “disclaiming.” Just because someone has left something for you in an estate planning vehicle doesn't mean you're required to take it. An inheritance might be more likely to come from a last will and testament, but an inheritance can also arise if you're the primary or contingent beneficiary in a life insurance policy, trust or individual retirement account (IRA).

Most people who receive an inheritance choose to accept it. Yet in certain cases, there might be situations where you want to refuse, or disclaim it.

Why would you disclaim inheritance?

The simple answer is that you don't want it. But why might you not want it? The reasons to disclaim an inheritance can vary but usually involve two possibilities.

Financial reasons

First, you want the inheritance, but there are practical or financial reasons that keep you from accepting it. For example, the inheritance could be a childhood home that's in disrepair. So it requires major work and you do not have the time or money to take care of these tasks. Or perhaps the inheritance is a classic car, but you live in a major city and you don't have a driver's license and also lack a place to park it when it's not being used.

A more common issue is that the inheritance hurts you financially. This might happen if the inheritance results in taxes that you'd rather not have to pay. Alternatively, it might change your net worth or move you into a higher tax bracket. It could even jeopardize your ability to receive state or federal benefits, like Medicaid.

You don't want the inheritance

Second, you simply do not want the inheritance. There could be moral reasons for this feeling, such as a grandparent handing down to you a large gun collection, but you oppose the individual ownership of firearms.

The reason could be more straightforward, such as the inheritance consisting of the deceased's collection of postcards you couldn't care less about. Then there are situations where you want someone else to have the inheritance. It could be because you feel someone else will appreciate it more or you believe the deceased would have preferred someone else to have it. Then there's the situation where the inheritance consists of money you don't need and you know the person who is in line to inherit the money after you is struggling financially.

Lastly, there are situations where your reason for wishing to disclaim inheritance stems from a combination of considerations. A good example is when the inheritance constitutes owning a business (or a partial ownership interest in a business) that is struggling financially. Not only do you have no desire to run that business, but you also don't want to risk being responsible to pay its debts and tax obligations.

How to disclaim inheritance

The exact process depends largely on where the inherited property is coming from and the applicable laws. For instance, the IRS' inheritance disclaiming requirements for federal tax purposes may be different than a state's trust and estate statute outlining the disclaiming process. However, there are some general requirements that most people disclaiming an inheritance will have to follow:

  • The disclaimer must be in writing.
  • The disclaimer must be given to the appropriate individual or entity, such as a probate court, trustee, executor/personal representative or administrator.
  • The person disclaiming the inheritance must do so within a reasonable amount of time. This often means disclaiming the inheritance must be done within nine months of the event leading to an inheritance.
  • A disclaimer must apply to the entire inheritance, not just part of it.
  • Disclaiming an inheritance can only occur before the beneficiary has accepted it.
  • The person disclaiming the property can have no say in what happens to the property after it's disclaimed.

There are a few exceptions or caveats to discuss.

Minor beneficiary

If you're a minor at the time of the inheritance, you have to wait until you become a legal adult (which could be 18 or 21, depending on applicable law) to disclaim the property. And only after you become a legal adult, will the “reasonable amount of time” or nine-month clock begin ticking.

Can you disclaim a portion of an inheritance?

In some cases, you can disclaim part of the inheritance. One situation when this might occur is if the inheritance consists of multiple individual gifts, such as a car, house and $10,000 cash. You could choose to accept the cash, but disclaim the car and house. Another situation where partial disclaimers may be possible is when accepting an inheritance that is an IRA.

What happens after you disclaim an inheritance?

The general legal principle states that when you disclaim an inheritance, it will be like you never existed with respect to owning or controlling that property. In some cases, the state's inheritance laws will treat you as if you died before the decedent. Let's look at several examples to illustrate.

First example

In the first example, imagine you're the primary beneficiary of your spouse's life insurance policy and your adult child is the contingent beneficiary (this is someone who receives proceeds when the primary beneficiary can't or won't accept the proceeds). Your spouse passes away, so you're in line to receive the life insurance proceeds. But maybe you don't need the money, but your adult child could use the money to pay off some student loans and buy a house.

If you disclaim the life insurance inheritance, the proceeds will pass to your adult child, who is the contingent beneficiary. This is the same result as if you died before your spouse did.

Second example

The second example involves a will and the “per stirpes” and “per capita” methods of property distribution. Each of these will handle the situation where the beneficiary dies before the testator (the person who created the will) very differently. As far as the probate court is concerned, when someone disclaims an inheritance under a will, the probate court will proceed as if the disclaiming individual died before the testator.

Per stirpes means “by branch” and requires property to be passed down through each respective “branch.” Per capita means “by the head” and requires property to be passed down to surviving individuals in equal shares. This all sounds confusing, but it makes sense if we look at an example using the following setup:

  1. Alfred (decedent/testator): Father of Bob, Brenda and Bonnie
    1. Bob: A child of Alfred and one of the three beneficiaries in Alfred's will.
      1. Christine: Bob's daughter
    2. Brenda: A child of Alfred and one of the three beneficiaries in Alfred's will.
      1. Conrad: Brenda's son
    3. Bonnie: A child of Alfred and one of the three beneficiaries in Alfred's will.
      1. Bonnie has no children

Alfred dies. In his will, he leaves $10,000 cash for each of his three children, per stirpes. This means that if they're all alive when he dies, Bob, Brenda and Bonnie each get $10,000. But let's say when Alfred dies, Brenda is already dead.

In this situation, Bob gets $10,000, Conrad gets $10,000 and Bonnie gets $10,000. Because per stirpes applies here, Brenda's $10,000 inheritance automatically gets passed down to her descendant, Conrad; it does not get divided among Bonnie and Bob. If Brenda wasn't dead, but disclaimed her $10,000 inheritance, the result of who got the $10,000 would be the same, namely Conrad, Bob and Bonnie each get $10,000.

Now let's change things up so that Alfred's will is the same, but the $10,000 cash inheritance for each child is per capita. Because Brenda died before Alfred, neither she nor her son Conrad will get anything. Instead, the per capita requirement from Alfred's will means the $30,000 would get divided among Alfred's surviving children.

This means Bob and Bonnie each get $15,000. And if Brenda doesn't die before Alfred, but instead disclaims her $10,000 inheritance, the result is the same such that Bonnie and Bob each get $15,000.

Third example

In the third example, let's say your parent had a will that left you a valuable art collection. Let's also assume that the will said if you died before your parent did, the art collection would go to your sister. After your parent dies, you consider disclaiming your inheritance of the valuable art collection.

You're thinking about disclaiming the inheritance because you want the local art museum to get your parent's art collection. If your sister got the art collection, she'll probably keep it for herself or sell it all to random art collectors. In this scenario, your wish for the local art museum to get the art collection is unlikely to be fulfilled.

What happens after you disclaim the art collection is that your sister would get the art collection, not the museum. Remember, the applicable law will most likely treat you as if you died before your parent for purposes of how the art collection should get passed down.

Additionally, recall that part of the disclaiming process (at least for certain contexts, such as federal taxes) requires that you have zero say in what happens to the property you're disclaiming. So as soon as you disclaim your inheritance, your sister immediately gets ownership of the art collection (assuming she doesn't disclaim it either).

A beneficiary disclaiming a portion of an inheritance by splitting a stack of coins in half.

Of course, there are some potential ways around this. However, they may not be legally enforceable or practical depending on the relationship you have with your sister.

Using the above example involving your parent's art collection, what you might be able to do is negotiate some agreement with your sister. If your sister wanted the art collection, whether it be to sell because she needs the money or to add to her already existing art collection, you could possibly work out a compromise with her.

You could tell her you don't want the art collection and but prefer it go to the local art museum. She might agree to accept the art collection after you disclaim it, but then donate part of the collection to the local art museum.

One thing to keep in mind is that after you disclaim the property, if your sister refused to go through with her part of the agreement, you probably can't do anything about it. This is because you're not allowed to control how property gets transferred if you want to disclaim it.

But you might be thinking, “Why go through all this trouble? Why can't I just accept the art collection myself, then donate it to the local art museum?” The problem is that even though you may only have legal possession of the art collection for a short period of time, it could have a significant effect on your financial situation.

Depending on what state you're in and the value of the art collection, you may have to pay significant estate or inheritance taxes. This might require you to sell some of the art pieces (or other personal property that you own) to cover your tax obligation.

Another potential situation might include your parent passing away at the same time you're involved in a bankruptcy proceeding or civil lawsuit where you could have to pay monetary damages to one or more plaintiffs. If you accept the art collection, you may lose your ability to donate it to the local museum because the plaintiffs or bankruptcy creditors may have a legal right to it.

Bottom line

When most people learn that they're about to inherit property, they want to keep what they receive. But there are sometimes practical, financial or personal reasons that someone may not want to accept a gift through inheritance.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
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