Disclaiming a Gift or Inheritance

Disclaiming a gift could help you save on estate or gift taxes, particularly if you’re rich.

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When you receive a gift from someone’s estate, you can refuse to accept the gift for any reason. This is called “disclaiming” the gift, and the refusal is called a disclaimer.  When you disclaim a gift, you do not get to decide who gets it.  Instead, it passes on to the next beneficiary, as if you did not exist.   

EXAMPLE:

Your mother leaves you $10,000 through her will, naming your cousin Bob as an alternate. If you disclaim the gift, Bob will get the money.

Reasons to Disclaim a Gift

Why would you want to disclaim a gift?  Here are a few possibilities:

To reduce the size of your estate.  If you’re worried about estate taxes, you may want to disclaim a gift to reduce the size of your estate.  In that case, it could make more sense to let the gift pass to the beneficiary next in line, rather than take the gift and risk paying estate taxes on it when you die.  However, keep in mind that the federal estate tax exemption for 2013 is $5.25 million. So unless your estate is close to that size -- or would be with the gift -- you do not need to worry about paying estate tax.  (Learn more about Estate and Inheritance Taxes.)

To pass the gift on. If you want the gift to go to the next beneficiary, then it’s more efficient to disclaim it than to accept it and pass it on yourself. In this case, a disclaimer can save a lot of hassle – particulary if the gift is real property that will have to be retitled.  If you have a large estate, disclaiming the gift could also save on gift taxes – because if you take the gift and then pass it on, it will be subject to gift tax. With a disclaimer, no gift tax is assessed because you never own the gift.  (Learn more about Gift Taxes.)

To adjust intended gifts.  Sometimes gifts are not worth what the deceased person thought they would be, and the result is not what he or she intended.  A disclaimer can help realize his or her wishes.

EXAMPLE:

When Ben writes his will, he decides to leave his entire estate to his wife Linda, except that he wants to leave each of his children a little cash.  So he leaves $75,000 to each of his children, with his wife Linda as an alternate beneficiary for each.  He leaves the rest of his estate, which included their house and his substantial savings, to Linda. Ben dies after a long illness, which depleted his savings entirely. So, Linda is left with the house, but no money.  The three children agree to disclaim their gifts, which go to Linda, because they know that their dad intended for her to live comfortably after his death. 

How to Make a Disclaimer

To ensure that you never legally own the property, follow these rules when making a disclaimer:

  • Put the disclaimer in writing.
  • Deliver the disclaimer to the person in control of the estate – usually the executor or trustee.
  • Complete the disclaimer within nine months of the death of the person leaving the property. (Or nine months after you turn 21, for minors.)
  • Do not accept any benefit from the property you’re disclaiming.

If you have any questions about disclaiming, see a lawyer for help – especially if you’re counting on the disclaimer to reduce or avoid estate taxes.  To find an experienced estate planning lawyer in your area, try searching Nolo’s Lawyer Directory.

by: , Attorney

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