Too often, people develop their estate plan without communicating with their loved ones about what they would or wouldn’t like to inherit. They may not take into consideration whether a particular individual actually wants an asset, let alone how it might impact them financially. This oversight often stems from a lack of knowledge about how valuable inherited assets can result in tax consequences.
Thankfully, if you’ve inherited a large and/or valuable asset that you don’t want, you have the option to decline or “disclaim” all or part of it. However, this needs to be done according to IRS regulations and state law. The asset that has been disclaimed is then treated in the same way it would be if the beneficiary had predeceased the person who left it to them. That means it will go to the contingent beneficiary, if one was named. Otherwise, it typically goes back to the estate. Disclaiming an inheritance doesn’t give you the right to choose who gets it.
What does the law require?
Under Kentucky law, you need to file an appropriate disclaimer document within nine months of when the deceased passed away or of the date you were otherwise determined to be the beneficiary. The disclaimer needs to be filed with the appropriate court, with a copy going to the personal representative (executor) of the estate. If the property is real estate, a copy also needs to be filed with the appropriate county clerk.
The IRS also has requirements disclaiming property to help those affected avoid inappropriate taxation. The person disclaiming the asset cannot do the following if they want to avoid being taxed:
- Have benefited from any proceeds of the asset
- Receive it in any other way after disclaiming it (returned to them “under the table,” so to speak, to avoid tax consequences)
- Influence whom it goes to subsequently
This process is typically used for large assets like homes or boats and for very valuable assets that can have tax implications. If you inherit a vase from your mother or an antique pocket watch from your father that’s worth a few hundred dollars, with no contingent beneficiary listed, you likely would have no reason to formally disclaim it.
Just about anything that involves the administration of an estate and probate law requires adherence to specific laws. That’s why it’s a good idea to have legal guidance if you’re considering disclaiming an inheritance to avoid negative consequences.