You’ve just found out you’re going to receive an inheritance. There’s just one problem: you don’t want it. Can you decline an inheritance? It is possible, but, before you do anything, you should make sure you understand all your options and the possible consequences.
Can You Refuse an Inheritance? Reasons You Might Want To
As we covered in a previous article, it is possible to refuse or disclaim an inheritance. This is important because there are many circumstances in which a person might want to reject an inheritance, including if:
- The inheritance would be more trouble than it’s worth. As Investopedia explains, a “white elephant” is a burdensome possession. Often, the cost of upkeep outweighs the usefulness or value of the possession. The term comes from the old Thai practice of giving actual white elephants to monarchs. If you inherit a house, boat, or other asset you can’t use, don’t want to pay taxes on, don’t want to have to maintain, and would have a hard time selling, you might consider the inheritance to be a white elephant.
- The inheritance would jeopardize your benefits. Receiving an inheritance does not always make a person ineligible for benefits, but some types of inheritances can impact certain benefits. For example, an inheritance could impact your SSI benefits due to the strict income and resource requirements.
- You have personal reasons for not wanting the inheritance. Family dynamics aren’t always positive. If you’ve felt that it’s necessary to cut a relative out of your life, you may not want anything to do with the person’s estate.
- You don’t need the inheritance. If you are doing well, you might not need an inheritance – you might prefer it to go to someone who does need it. For example, your parents may have split their estate evenly between you and your siblings even though you are financially well off and your siblings are struggling financially.
Pitfalls When Disclaiming an Inheritance
If you decide to refuse an inheritance, you need to be careful how you go about it. Otherwise, you could end up facing unintended consequences. You:
- Might technically own the assets. Imagine you receive an inheritance from an estranged relative. As you want nothing to do with this person in life or in death, you simply ignore the inheritance. Then, you receive a massive tax bill. In this situation, you’re liable for the asset because you failed to go through the formal procedure of disclaiming the estate. According to the IRS, you need to follow certain rules, which include putting the disclaimer in writing. Investopedia warns that there may be other restrictions depending on your state, such as a requirement that the person disclaiming the inheritance is not subject to bankruptcy proceedings.
- Won’t get to decide what happens to the inheritance. When you disclaim an inheritance, you’re saying you don’t want anything to do with it, meaning you don’t get to decide what happens to it. Imagine you have two siblings. The three of you are set to inherit equal shares of your parents’ estate. Since you want everything to go to one sibling who is struggling, you disclaim your inheritance. Then, you learn your share was divided equally between your two siblings instead of just going to the one who needed it. When you disclaim an inheritance, the will (if there is one) or state law (if there isn’t) determines what happens to the inheritance.
- Might regret your decision. Let’s say you decline an inheritance because you’re worried it will jeopardize your benefits. Later, you learn that you would not have lost your benefits. By then, though, it’s too late to reverse your decision. Since disclaiming an inheritance can be a big decision – especially if the inheritance is sizeable – you should not rush into it without first understanding the implications.
Alternatives to Disclaiming an Inheritance
Rejecting an inheritance may be the right decision for you. However, before you make up your mind, consider other options. You could:
- Accept the inheritance and then donate it. One advantage to this strategy is you are able to decide what happens to the inheritance. You may also qualify for tax deductions. However, you’ll need to make sure you understand any possible tax liabilities, such as a state inheritance tax. (Oregon has an estate tax but not an inheritance tax. Read this to understand the difference.)
- Discuss the inheritance in advance. Families often avoid talking about estate planning because they find it a difficult topic, but this can lead to bigger problems down the road. If you would rather not inherit something from someone who is likely to name you in a will (such as a parent), discuss this with the person. Likewise, if you are writing your own will, you may like to discuss your plans with your beneficiaries. This can prevent surprises and disputes.
If you decide to decline an inheritance, work with an attorney to ensure you file the necessary paperwork correctly. Contact Skinner Law.