The inheritance then passes to the next beneficiary, altogether bypassing the person who disclaims. Disclaiming an inheritance is not typical. At one time this was the main reason to file a disclaimer, but not so much anymore. Not many individuals or couples have estates valued that high. Only one state, Maryland, has both! Check the Tax Foundation to find out what your state has. This is especially true if that person is in a lower tax bracket, or in the case of an inherited IRA or annuity, younger AND in a lower tax bracket.
They can stretch out distributions over a more extended period. If you give gifts more than the annual exclusion amount, you have to file a gift tax return. The point here is you can use disclaiming to give a gift, but not have it count as a gift, and not have to file a gift tax return.
Does that make sense? If you want to learn more, read my post Understanding the Gift Tax. Sometimes the best intentions go awry. A disclaimer can help realize the original intent by making it more equal for all beneficiaries. For example, in her will, Mary stipulated that stocks A-M were left to her son, and stocks N-Z went to her daughter. That was not the original intent. If the daughter felt bad for her brother, and if he was the next beneficiary in line critical point , she could choose to disclaim some of the stocks to try to equal out their inheritance.
Wills can be designed to allow the surviving spouse to disclaim the assets. The assets then move into a protected trust for the surviving spouse, allowing the survivor and heirs to benefit from the assets, but have them sheltered from future creditors and any potential future remarriages. I want you to be aware that disclaiming can be an appropriate strategy for estate planning, but you need to seek the advice of an estate planning attorney who specializes in this strategy.
You have to take the consequences of your disclaiming decision into consideration and understand the limitations. You need to carefully assess if disclaiming that property is also in the best interest of the next recipient. Consider the wording and timing. Under federal law, only a spouse can waive rights to employment-related retirement benefits, she said.
So to be effective, the wording of a pre-nup would need to indicate your fiance is agreeing to sign that waiver after you're hitched. If you're inheriting, carefully assess if disclaiming that property in whole or in part is the best option.
Once that decision is made, it's irrevocable, so it's important to carefully consider how much, if any, of those funds you can afford to pass up, Burns said. Next point of consideration: Who's next in line to inherit? That might not matter much if you just don't want say, the family time-share, but it could make a big difference if you're disclaiming strategically with the aim of passing assets to a specific person.
If the deceased didn't specify who would get a disclaimed asset or that it would go into a trust, state law determines what happens next.
The asset might go to whoever gets the rest of the estate, or state intestacy laws might apply as if there was no will, he said. Consult experts including a financial advisor and attorney about possible financial consequences to you. In these cases, refusing the gift may be the tax-efficient thing to do. Trusts, as just described, and qualified disclaimers are used to avoid federal estate tax and gift tax , and to create legal intergenerational transfers that avoid taxation.
As noted above, if an individual makes a qualified disclaimer with respect to an interest in the property, the disclaimed interest is treated as if the interest had never been transferred to that person, for gift, estate, and generational-skipping transfer GST tax purposes.
Someone who makes a qualified disclaimer will not incur transfer tax consequences because they are disregarded for transfer tax purposes. Keep in mind that 12 states and the District of Columbia also have estate taxes, and five states have inheritance taxes. In addition to reducing federal estate and income taxes, there are a few more reasons why a beneficiary may want to disclaim inherited assets:.
For example, let's say John designates his son, Tim, as the sole beneficiary of the assets in his retirement plan.
When John dies a few years later, Tim stands to inherit the money, but if he does, he will no longer be eligible for student aid at college. Tim decides to disclaim the assets. He therefore properly disclaims the assets and is now treated as if he never was the designated beneficiary. As explained above, if John previously designated a contingent beneficiary, that person or entity , would become the successor beneficiary. Trusts can be used in estate planning to give individuals and couples greater control over how assets are transferred to heirs with the fewest tax consequences.
Sometimes, however, disclaiming assets makes the most sense. No special form or document must be completed to disclaim inherited assets. A letter usually suffices, providing it meets the requirements listed above. Talk to your tax professional to find out under which circumstances tax consequences could arise when disclaiming inherited assets. These may not apply to you, but they may apply to the successor beneficiary. Some disclaimers may require court approval if, for instance, the individual disclaiming the assets is mentally incapacitated or a minor.
As with any financial planning decision, it is best to seek the advice of a professional who specializes in this area to avoid making errors that can complicate estate executions. Use the information here as a guide to issues you should discuss and options to consider; it should not be used as legal advice. Internal Revenue Service.
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