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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
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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