Inheritance Disclaimers Can Help Heirs Beat Taxes
When it comes to estate planning, sometimes it pays to look a gift horse in the mouth.
Giving up all or part of an inheritance may seem odd to most people. But financial advisers say disclaimers, as they’re called, are an efficient way for certain individuals to pass a bequest along to someone else, usually a family member of less means, and to save on estate taxes.
A disclaimer works this way: Any property forfeited by a beneficiary is never legally owned by that person. In the eyes of the federal law, the individual is considered to have died before the person making the bequest.
That means the gift automatically passes on to an alternate beneficiary named in a will or trust, or the next of kin if there is no will, and cannot be included in the first beneficiary’s taxable estate.
There are several restrictions involved, however. The Internal Revenue Service requires a disclaimer be in writing and completed within nine months of the death of the person leaving the property. Minors who’ve been left property must file a disclaimer within nine months of reaching age 18.
In addition, the person who disclaims property is generally not permitted to share in any of its benefits.
“If someone leaves you stock and you take the dividends, you lose the right to disclaim it,” said Robert C. Neff, a Florham Park, N.J., attorney specializing in estates and trusts.
The biggest advantage to a disclaimer is the tax benefits.
While there’s no limit to how much spouses can leave each other without paying federal estate taxes, the IRS taxes anything beyond $600,000 that’s left to everyone else. The tax rate ranges from 37 percent to 55 percent, but could easily exceed 60 percent when state and local taxes are added.
Let’s say a father leaves his $500,000 estate to his daughter, who has an estate of her own valued at $800,000. Because the father’s estate falls below the $600,000 threshold, no federal tax is due. But when the daughter dies, her estate would total $1.3 million and substantial estate taxes would be assessed on her death.
Had the daughter disclaimed the gift, only $200,000 of her estate would be subject to tax upon her death.