Monday, February 22, 2010

When and Why You Might Turn Down An Inheritance

Would you ever turn down an inheritance?

Your first reaction might be “Of course not!” But don’t speak too soon. Most estate plans are created at least in part to protect heirs (generally spouses and children) from the sometimes devastating blow of estate taxes; but with the estate tax in a confusing state of flux this year some of these plans won’t work as their creators intended—and heirs may end up looking for a way to protect themselves against the unintended consequences of well-intentioned estate plans.

This article in the New York Times explains what it means if you disclaim (or turn down) an inheritance, and when you may want to employ this tactic. 

“Historically, lawyers have recommended disclaimers to repair estate planning oversights that bring negative tax consequences — as when parents left money to already affluent adult children. In such a case, the children could disclaim, so the inheritance would go their own children instead, rather than facing the possibility that this money might be taxed in their own estates.”

The article goes on to explain why some people might consider using this strategy this year, when—due to the expiration of the estate tax—“a formula clause could wind up allocating all the money to one [heir] or the other, rather than dividing it between the two.”

Although this is an interesting solution to be considered in some cases, there are no easy answers to the question of what to do when you are the beneficiary of an estate that has taken an unexpected turn.  If you have any questions whatsoever about an inheritance—or about your own estate plan—call your estate planning attorney for help.