Congratulations! You're named as a beneficiary in a will and due to inherit something you may not have expected. But don't get too excited — yet. On occasions, inheritances are more like curses than blessings.
See also: Good reasons to change your will.
Here are six scenarios when you might want to reject a bequest.
1. It's a smart tax move. Is the next person in line to receive the bequest close to you and in a lower tax bracket? Jeff Scroggin, a tax and estate-planning lawyer in Roswell, Ga., offers this example:
Your widowed mother passes, designating you as the beneficiary of her $40,000 individual retirement account and your college-bound daughter as the contingent beneficiary. You're in the top tax bracket, and your daughter is in the bottom. If the money's going to end up at the same place — say, your daughter's college — consider allowing the bequest to pass to your daughter and having it taxed it at the lower rate. Of course, a windfall might affect her ability to obtain financial aid, so you should weigh that factor before declining the bequest to allow your daughter to receive it.
Be sure about who's next in line, though. "We don't recommend clients do disclaimers unless we've looked at the documents to make sure how the bequest will flow," says Scroggin. "Typically, you have nine months to make that decision."
2. It's a dog of a property. "Sometimes people don't want to deal with an asset," explains Rial Moulton, an estate-planning lawyer in Spokane, Wash. "I had a client who had property in New Mexico that he thought was going to be worth a lot of money one day. His son knew his dad had been trying to sell it and couldn't and thought, 'The state's going to want me to pay property taxes on it. Let the state have it.'"
It may also be smart to decline environmentally dodgy property. "I had a client whose uncle owned a building with dry cleaners in it for 50 years," says Scroggin. "Luckily, the client happened to mention that early on. We did testing and found soil contamination. My client disclaimed that building because the cost of cleanup outweighed any benefit." If everybody down the line to inherit rejects a bequest, the state becomes the lucky owner.
3. It will trigger a government aid eligibility review. "This is something I deal with a lot," says Steve Weisman, an estate-planning and elder law attorney in Cambridge, Mass. "Someone may receive a bequest that would disqualify him for government assistance, particularly Medicaid, where recipients can't have more than $2,000 in assets. You're required to report monies you receive and would have to go off Medicaid until you spent down the money."
Veterans Affairs Aid and Attendance benefits and Supplemental Security Income can also be affected, adds Weisman.
Consult with a lawyer to determine whether disclaiming will even be successful and whom to notify if you must accept a bequest. "Medicaid has in some instances said you don't have a right to refuse bequests," says Weisman. "You must accept them and spend them down."
4. It will trigger family drama. "Maybe a vacation home has been in the family for a long time, and family members aren't going to get along when it comes to management and maintenance," explains Weisman. "I've seen people say it's not worth it."
Ask if you can disclaim the bequest and receive something of similar value from the estate instead. "The executor may have been given the authority to divide the assets," says Weisman. "Then it comes down to negotiation."
5. It will go to your creditors. If you're on the brink of bankruptcy and an inheritance won't wipe away all your debts and then some, it may essentially be transferred from your loved one to your creditors, explains Stephen Mooney, an estate-planning lawyer in Danvers, Mass.
Mooney suggests encouraging potential benefactors who are still alive to create a spendthrift trust, which would legally allow you to receive regular payments but prevent your creditors from accessing the principal.
If you're already in bankruptcy, don't be tempted to quietly reject a bequest. "If you disclaim property during bankruptcy and don't disclose your property interest, the bankruptcy trustee could go after it in spite of your disclaimer," says Mooney. "Sometimes people are tempted not to disclose, but that's not a good idea." Notify your bankruptcy attorney before you respond to any bequest, or if you filed for bankruptcy without an attorney, notify the trustee who's been assigned to handle your bankruptcy of the potential bequest.
Potential outcomes if you don't notify the trustee: You could be charged with bankruptcy fraud or your bankruptcy petition could be dismissed, leaving you at the mercy of your creditors.
6. It's the right thing to do. "Maybe your parents wanted to provide for their children equally," suggests Mooney. "But you're very successful, and your sibling is struggling. Disclaiming may get a bequest to a person for whom it makes more sense."
If you decide that a bequest won't benefit you, how do you decline it effectively? "Your rejection needs to be written, explicit and signed," says Mooney, "and it must be irrevocable and unconditional."
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