When It Makes Sense to Disclaim (Refuse) Some or All of an Inheritance

If Your Spouse Passes Without an Estate Plan is it too Late to Minimize Estate Taxes?

If your spouse has just passed away and you did not create a detailed estate plan, you may find yourself inheriting everything automatically—especially if your assets were held jointly and you are named as the beneficiary. 

Being the surviving owner or beneficiary is a common scenario, but is it always the best outcome?

It can be problematic. By inheriting all of your spouse’s assets, your estate will include both of your combined assets, plus any future growth. This could increase estate tax liability when it’s your turn to go, leading to avoidable tax burdens for your heirs.

Understanding Joint Tenancy & Why Disclaiming an Inheritance May Help

With joint tenancy, two or more people own property with equal rights of use, access and “survivorship.”  When one owner dies, their ownership automatically transfers to the surviving owner(s). Survivorship is convenient, especially with married couples, but it may not advance your tax and estate planning objectives. That’s where disclaiming inheritance can be a valuable strategy.

What Is a Disclaimer & How Can It Help?

A disclaimer is a signed legal document in which a person declines to accept survivorship or any gift or inheritance. For surviving spouses or joint tenants, a disclaimer means choosing not to accept the portion of an asset that has been inherited from the deceased. Instead the asset will pass to the decedent’s heirs according to the governing document or state law.

Put another way, a disclaimer has the effect of treating a jointly held asset as having been owned as tenants in common. A tenant in common’s interest passes to the estate of each tenant in common.

Why Would a Surviving Spouse or Joint Tenant Disclaim?

1. Reducing Estate Taxes: One of the most common reasons for disclaiming inheritance in joint tenancy is to lower estate tax liability. By disclaiming their interest, the surviving joint tenant can remove the value of the property that they have disclaimed from their taxable estate. This can significantly reduce potential estate taxes upon their own death. With estate taxes varying from 10 to 40%, avoiding unnecessary tax will transfer more wealth to your heirs.
2. Achieving the “Just” Result: Maybe the surviving joint owner or beneficiary was not the real intended recipient or they realize that others could benefit more than they will by keeping the asset for themselves and disclaiming will pass the asset to the just owners.
3. Avoiding Probate (or Making It Worthwhile):
   • In some cases, disclaiming assets can help avoid probate. Probate can be time-consuming, expensive, and public, making it undesirable for many. By disclaiming, the property can pass directly to the deceased joint tenant’s other beneficiaries, if there are any, bypassing eventual probate.
   • However, in other cases, a disclaimer may result in probate—but with overall tax savings that outweigh the cost. We end up “probating” the deceased joint tenant’s portion, which can be worth it in order to achieve the ultimate tax savings. A financial analysis should be done to compare costs and benefits.
4. Protecting Assets from Creditors: Disclaimers can be used to protect assets from creditors or potential lawsuits. If the deceased joint tenant had debts or liabilities, a joint tenant’s disclaimer may help shield the assets from those claims. Or vice versa: Disclaiming by the survivor can reduce the amount that the survivor’s creditors have to go after.

Example: How Disclaiming Assets Can Reduce Estate Taxes

Consider this scenario for siblings:

• Alice and Bob are siblings who own property as joint tenants with right of survivorship.
• Alice passes away, and her share automatically transfers to Bob.
• Bob chooses to disclaim the inheritance of Alice’s half which will now pass to her heirs according to her will or law. 
• Bob doesn’t want or need his sister’s half, sees the future tax savings in his estate, and is happy to have Alice’s kids inherit.

For spouses:

With children of the same marriage next in line, a disclaimer will most often result in the asset passing to the couple’s children. This could have complications, or turn out to be a perfect solution at the time. If there are children of a previous marriage, the consequences could be acceptable – or not.

Key Considerations for Disclaiming Assets in Estate Planning

Before disclaiming, consider these important factors:

1. Time Limits: There are typically strict time limits for filing a disclaimer. The deadline can vary by state, so it’s crucial to consult with an estate planning attorney promptly. Nine months from death or the moment of vesting (tricky concept) is typical. 
2. Irrevocable Decision: Once a disclaimer is filed, it is generally irrevocable. This means that the surviving joint tenant cannot change their mind later – so professional legal guidance is essential. 
3. Cannot Direct Where the Asset Will Go: The surviving joint tenant who disclaims cannot choose who receives the asset. The property will typically pass to the deceased joint tenant’s beneficiaries who are next in line as specified in their will or trust. It’s important to consider who will inherit the property if a disclaimer is filed.
4. Use Restrictions: The disclaiming party cannot have used, spent, or taken control of the deceased’s half before disclaiming (except in the case of real estate).
5. Any benefit can be disclaimed: Joint accounts, real estate, IRA’s, annuities, life insurance, and trusts can all be considered for this option.
6. Partial Disclaimers: The surviving joint tenant can disclaim all or just a percentage of the asset, making the disclaimer a precision tool.
7. Disclaiming may involve probate: If the asset being disclaimed does not have another owner or beneficiary listed, probate of the deceased’s estate may be required.

Final Thoughts: Estate Planning After a Spouse Dies

Disclaimers can result in big savings or other better results compared with knee-jerk inheriting. If you’re navigating estate planning after a loved one dies, schedule an appointment with one of our paralegals to start the conversation.

Note: Disclaimer laws can vary significantly from state to state. It’s essential to consult with an attorney familiar with the laws in your jurisdiction.