It is better to Disclaim than to Receive

Your grandmother always told you that it is better to give than to receive.   Lawyers generally encourage clients to accumulate assets, but it turns out that Grandma might have been on to something.  It might make sense to disclaim an asset.

Let’s say Grandma recently passed away at the ripe old age of 104.  She made her last will in 1962 shortly after your grandfather died, leaving everything to your mother who is now 80.  Mom is in great health and doesn’t need the money, so she “disclaims” Grandma’s inheritance, and it passes automatically to the next person in line who just happens to be you.  Now, a disclaimer is, in a sense, playing catch-up ball.  Ideally, Grandma would have updated her will, even in the last weeks of life, as Elizabeth Edwards recently did with entertaining consequences.

What are some of the reasons you would disclaim an inheritance?

Change Beneficiary Designations.  After Mom passed away, Dad named Junior the beneficiary of his IRA.  Later, Dad married Joyce, and after many happy years together, Dad died without ever having changed the beneficiary designation on his IRA, meaning Junior is due to get the money.  If the IRA says that the default beneficiary is the surviving spouse, then Junior can disclaim, and Joyce will get the money.  The disclaimer means that Joyce could be in like Flynn.  This technique can also be used with beneficiary designations on other financial instruments, such as life insurance.

Redistribute Property.  Mom and Dad always treated their children Dick, Jane and Sally equally.  Sally is now a captain of industry and worth a fortune.  Jane runs a private bank in Switzerland.  Dick hasn’t worked in 5 years.  Dad died many years ago. Mom just passed away this year, and her will says “to my children in equal shares.”  Sally and Jane disclaim in Dick’s favor.

Asset is Toxic or Worthless.  Uncle Harry has run a gas station in Nowhere, Nebraska since 1963.  Harry’s underground tanks have been leaking since 1964.  When going through Harry’s papers, you find that Harry is being sued by the EPA, the abutters, and a bunch of Philadelphia lawyers.  Harry had a major environmental contamination problem on his hands.  On a good day, Harry’s business and land are worth $500,000.  However,  the liabilities that go with the land run into the millions.   You decide that Harry took the easy way out.  Thanks, but no thanks, Harry, so you disclaim.

Be careful with disclaiming property, however, if you are in bankruptcy.  The bankruptcy court will likely consider even an expected inheritance as an asset, subject to the claims of creditors.  This is a planning opportunity, however, because prior to death, the person leaving an inheritance can make a variety of arrangements to avoid the unhappy outcome of the assets winding up in the hands of creditors.  A simple example is a spendthrift trust.

People receiving public assistance also need to be careful about disclaiming inheritances.  A disclaimer could disqualify a person on certain public assistance programs from receiving government benefits.  An answer might be a special needs trust.

Keep in mind also that a disclaimer made by an elderly person who subsequently needs to go into a nursing home might be considered a disqualifying transfer for Medicaid purposes.

Finally, when making a disclaimer, it is critical to be sure that the law of your state allows a disclaimer.  If it doesn’t, and if the property is transferred, the IRS might say that you have made a taxable gift.

The best way to deal with disclaimers is to avoid them to the extent possible by doing estate planning now.  Before making a disclaimer, it’s always a good idea to consult with a lawyer to guide you.

Posted in Estate Planning.

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