Can a beneficiary decline an inheritance?

Being named as a beneficiary in someone’s will is usually seen as a good thing. However, there are times when a beneficiary may want to decline or disclaim their inheritance for personal, financial or legal reasons.

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What does it mean to decline an inheritance?

Declining or disclaiming an inheritance means refusing to accept the assets you were left in the will. This is different from simply not using inherited assets. Declining an inheritance means you don’t want legal title to the assets.

When you decline an inheritance, it’s as if you were never named as a beneficiary in the first place. Instead, the assets go to the next named beneficiary in line. Or they may go through intestacy rules if there is no other beneficiary.

Reasons to decline an inheritance

There are a few common reasons a beneficiary may want to decline an inheritance:

Tax implications – Inheriting certain assets can result in capital gains taxes. Declining can avoid a large tax bill.

Creditor protection – Inherited assets may be seized by creditors. Declining protects assets from creditors.
Avoid family conflict – Declining can prevent disputes over how assets should be divided.
No need or interest – Beneficiary may already be financially secure or not want the property.

How to decline an inheritance

The process for declining an inheritance depends on the type of assets involved:

Probate assets – File a disclaimer document with the probate court within 9 months of the death.
Non-probate assets – Follow the procedure outlined in the asset documents, such as a life insurance policy.

Joint tenancy assets – Execute a written disclaimer document.

It’s important to follow the correct procedure within the required timeframe, or the disclaimer may not be valid.

Can a spouse decline an inheritance?

Yes, a surviving spouse can decline part or all of an inheritance from their deceased spouse. Some reasons a spouse may want to disclaim inheritance include:

To maximize tax advantages – Assets can pass tax-free to children if spouse declines.
Creditor protection – Keeping inheritance separate protects assets from spouse’s creditors.
Remarry – Declining inheritance simplifies estate planning if remarrying.

The same general process applies for a spouse disclaimer. However, special rules may allow a spouse more time to make the decision in some cases.

Surviving spouse inheritance rights

A surviving spouse does have some protected inheritance rights that cannot be disclaimed:

Elective share – Right to claim a percentage of deceased spouse’s estate.

Homestead allowance – Right to home and furnishings up to specified value.
Exempt property – Right to limited value of assets and family items.
Family allowance – Right to reasonable allowance for living expenses.

These spousal rights take priority, so a spouse cannot disclaim them. But they can disclaim anything above and beyond these protections.

Can minor children decline an inheritance?

Minor children do not have the legal capacity to make decisions about declining an inheritance. Instead, a guardian or trustee must make that decision on their behalf.

In most states, minors can decline an inheritance through the following process:

Court appoints guardian/trustee for purposes of managing inheritance.
Guardian petitions court to disclaim inheritance on child’s behalf.
Court reviews request and authorizes disclaimer if appropriate.

Guardian files written disclaimer following court order.

The court will look at whether declining the inheritance is in the minor’s best interests. This usually involves tax or creditor protection planning.

Uniform Transfers to Minors Act

Some states follow the Uniform Transfers to Minors Act. This allows a custodian to decline an inheritance on behalf of a minor according to the following rules:

Custodian must not be transferring agent (executor).
Disclaimer must be filed within 9 months of death.
Assets pass as if minor had disclaimed.

The custodian does not need court approval, making the process easier. But the disclaimer must still benefit the minor.

Can an executor decline an inheritance?

Yes, an executor can disclaim assets from an inheritance, with some limitations:

Cannot disclaim fiduciary fees or other compensation.

Can disclaim individual bequests received as beneficiary.
Should not make disclaimers that benefit executor personally.

Additionally, if the executor is also a beneficiary under the will, they cannot make disclaimers that would divert assets to increase their own inheritance.

In most cases, it is advisable for the executor to step down from that fiduciary role before making any disclaimers of inheritance.

Executor fiduciary duties

An executor has fiduciary duties that include:

Acting with integrity, honesty and good faith.

Being impartial towards all beneficiaries.
Avoiding self-dealing or conflicts of interest.

Making disclaimers that enrich the executor at the expense of others may violate these fiduciary duties. Any disclaimers should be made carefully after fully stepping down as executor.

Tax implications of disclaiming an inheritance

Disclaiming an inheritance can have different tax impacts depending on the situation:

Income tax – Disclaimed inheritance is not subject to income tax.
Gift tax – Disclaimers are not subject to federal gift tax.

Estate tax – Disclaimed assets are not included in beneficiary’s estate.
Capital gains tax – Inheriting assets receives a step-up in basis, which is lost if assets are disclaimed.

In many cases, the tax benefits of disclaiming an inheritance outweigh the lost step-up in basis. However, professional tax advice is recommended.

Disclaimer for marital deduction planning

A common tax strategy is having a surviving spouse disclaim an inheritance to maximize use of the deceased spouse’s estate tax exemption. This also preserves assets in a credit shelter trust up to the federal exemption amount ($12.06 million in 2023).

Without proper trust planning, a portion of the deceased spouse’s estate exemption might otherwise be lost.

Can you disclaim an inheritance and still be a beneficiary?

Yes, it is possible to disclaim part of an inheritance while still remaining a beneficiary for other bequests. Some examples include:

Disclaim one asset, but accept other assets.
Disclaim residual estate, but accept specific bequest.
Spouse disclaims portion to use deceased spouse’s exemption.

Disclaim amount in excess of estate tax exemption.

Partial disclaimers can be tailored to meet the beneficiary’s objectives while still inheriting a portion of assets.

Rules for partial disclaimers

For a partial disclaimer to be valid, it must adhere to the following rules:

Clearly specify which assets are disclaimed.
Disclaimed assets must be separable from the rest.
Remaining assets must go to same beneficiary.

Meet all requirements for a valid disclaimer.

Effectively executing a partial disclaimer requires understanding the disclaimer rules and estate plan specifics.

Can you reverse a disclaimer of inheritance?

Once a valid disclaimer is made, it cannot be reversed. After an inheritance is disclaimed, the property immediately passes as if the disclaiming beneficiary was not named in the will.

There is no option to “take back” an inheritance after declining it. The decision is permanent. Some key points:

Disclaimer is irrevocable once complete.
Disclaiming beneficiary has no rights to disclaimed property.

Cannot undo a disclaimer after the disclaimed assets are distributed.

The only option would be for successors to voluntarily agree to redirect assets after receiving them. But they are not obligated to do so.

What happens when an inheritance is disclaimed?

After a disclaimer is made, here is the process for what happens next:

Interest passes as if beneficiary predeceased.
Assets transfer according to will or intestacy laws.
Disclaimed assets are distributed to alternate beneficiaries.

Disclaiming beneficiary has no further claim to the property.

At this point, the person who executed the disclaimer no longer has any rights or control over the disclaimed inheritance.

Conclusion

While declining an inheritance is an unusual step, there are valid reasons a beneficiary may choose to disclaim. The most common involve taxes, creditors, family disputes, or simply not needing or wanting the inheritance.

The process and rules for disclaiming vary based on the type of assets and beneficiary situation. Following proper procedures within strict deadlines is crucial to executing a valid disclaimer. Once complete, the disclaimer is permanent and cannot be reversed.

With proper planning, disclaiming an inheritance can be an effective strategy for protecting assets and carrying out the beneficiary’s wishes. Consultation with legal and tax professionals is highly recommended throughout the process.

Type of Beneficiary	Can They Decline an Inheritance?	What is the Process?
Surviving Spouse	Yes, with some exceptions for protected spousal rights.	File a written disclaimer document within 9 months.
Minor Children	Yes, through a guardian/trustee or custodian.	Guardian must petition court or custodian can disclaim under UTMA rules.
Executor	Yes, but with restrictions to avoid conflicts of interest.	Should resign as executor first, then file disclaimer.