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Disclaiming Inherited Wealth: When Does it Make Sense?
Published Date : August 17, 2015
As a high net worth individual with a robust balance sheet, you may find yourself the intended recipient of an inheritance and for the purposes of generosity and tax efficiency, would rather pass on to other family members. This may be especially true if you have an asset base in excess of the Federal estate tax applicable exclusion limit and worry that upon your death these additional inherited assets will find their way to the IRS rather than to your own beneficiaries. Under these circumstances, you may find yourself contemplating whether or not disclaiming inherited assets and allowing them to pass to your heirs is the best option for your estate plan. Making this decision has multiple variables to consider, including your own cash flow needs and the probability of triggering estate taxes and how assets will actually be disbursed to beneficiaries if you disclaim the inheritance.
Prior to foregoing any inherited assets, you – the original inheritor – should ask your financial advisor for an updated cash flow analysis report to test if your current expenses will be supported long term by your investment portfolio under scenarios involving both retaining or disclaiming the inherited assets. If the inherited assets are not needed to maintain your living expenses, then the next step is to see how you might be affected by the threat the estate tax. A future value analysis of both your potential estate value and the inflation-adjusted applicable exclusion amount will help you measure just how likely it is that your estate will trigger the estate tax. The ATRA, or the American Taxpayer Relief Act of 2012, now permanently provides each US citizen or resident alien with a tax buffer (or an applicable exclusion) against estate assets valued at or below $5,430,000* for individuals or $10,860,000* for couples.
Disclaiming an inherited asset is an option for all inheritance recipients within nine months following the death of the original assets’ owner. Once disclaimed, the inherited asset subsequently passes to the next beneficiary as dictated by the decedent’s will, trust, or the account’s beneficiary – the original beneficiary does not have any control over the disposition of the disclaimed asset. Given this lack of control, it is important to understand how accounts with named beneficiaries – primarily retirement accounts – will be disbursed after you have disclaimed the assets. The two most common forms of distribution, per stirpes and per capita, are often set up at the account’s origin and have very different outcomes to consider. Under the per stirpes method, your heirs will receive equal parts of what would have been your inheritance. With per capita, only the remaining named beneficiaries of the original account document will divide all of the inherited assets. If your heirs are not listed as original beneficiaries of the account in question, then they will not receive any of the assets.
As part of an overall strategy, Sand Hill’s advisors regularly use probability analysis to test as many “what if” scenarios as possible for clients going through financial transitions. Using this powerful tool greatly enhances our clients’ ability to make sound and informed decisions concerning important, and sometimes irrevocable, choices such as disclaiming inheritance.
*2015 inflation adjusted
General disclaiming info:
Per Stirpes info: scs.fidelity.com/accounts/services/content/faq.shtml
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