The Disclaimer: An Arrow in the Savvy Planner’s Quiver
We won’t all be lucky enough to inherit a large sum of money upon the death of a loved one. But, if you do, you may want to consider disclaiming that inheritance under special circumstances. When you disclaim an inheritance, you are refusing to accept it.
Some of you reading this are probably thinking, “You’ve got to be crazy if you think I am ever going to flat out refuse any money that I have coming to me.” Nevertheless, for others who already own plenty of property or are looking to reduce gift or estate or gift taxes, disclaiming an inherited gift could be in the best interests of you and your family.
Let’s say you already have a healthy estate of several million dollars when your father dies, leaving $400,000 to be split evenly between you and your sister. You know that your sister, a single mother, could really use the money and you would like to help her out. In this situation, disclaiming could be beneficial for in two ways.
First, by disclaiming your half of the gift, the entire $400,000 can be transferred directly to your sister. This kind gesture ensures that the person who really needs the property can have it with little difficulty or complications, since a disclaimant never truly owns the property. Furthermore, disclaiming a large gift could help minimize the size of your estate for the benefit of your family at the time of your death. Estates beyond a certain size have to pay steep estate taxes* before your money can go to your beneficiaries. By disclaiming gifts you don’t need, your family can avoid those taxes and enjoy more your hard-earned wealth.
Second, by disclaiming your half of the gift, you will not have to pay gift taxes on any amount you want to give to your sister. In 2014, the IRS limits the amount of cash that can be given tax-free to a particular individual. In this situation, if you were to accept the $200,000 and then try to give it to your sister as a cash gift, any amount over $14,000 given to your sister in a given year would count towards your lifetime gift limit.** Any amount of cash gifts which exceed that limit—$5.34million in a lifetime—will be subject to a gift tax of up to 40 percent. Ouch. To keep things simple and tax-free, disclaiming the inheritance is your best bet.
Deciding whether or not to disclaim is a big decision that can have serious benefits or consequences. In order to make the decision that is best for you and your family, speak with an experienced estate planning attorney before you act. If you need estate planning advice, call Lonich Patton Erlich Policastri to schedule a free half-hour consultation. Our attorneys are passionate about estate planning and have decades of experience handling complex estate planning matters, including wills and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information.
Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.
*To learn more about estate taxes, click here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax
**This is known as the “annual gift exclusion.” For those who are interested in learning more about the exclusion, click here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Gift-Tax