The old saying “Never look a gift horse in the mouth” is generally a wise thought; however, it may not always apply when estate planning is involved. While an inheritance is generally a gift that is welcome, despite the reason behind the gift, there are times when the benefits of accepting an inheritance are outweighed by the cost. When that is the case, you may want to disclaim the inheritance and let it pass to the next beneficiary in line.
Disclaiming an inheritance is often a tool used for “after the fact” estate planning. Ideally, the decedent planned ahead and a disclaimer is not necessary, but when that didn’t happen, a disclaimer may avoid a hefty tax obligation down the road.
Consider this scenario. Mary’s husband Sam died and left her all his assets. His estate assets totaled $3 million. The transfer from Sam to Mary qualifies for the unlimited marital deduction so no taxes are incurred. Mary also has assets of her own totaling $3 million. This means that Mary now has an estate worth $6 million. If Mary died tomorrow, $750,000 of those assets would be taxed at the estate tax rate of 40 percent, meaning the estate loses $300,000.
Mary may, instead, choose to disclaim her inheritance and let it pass to their children. By doing that, none of her estate is subject to estate taxes when is passes if she dies tomorrow and $3 million less is subject to estate taxes if she dies next year. This provides a very good reason to disclaim the inheritance.