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Chris Moore 2 Feb If you are considering disclaiming your inheritance, it is important to discuss your intentions with a knowledgeable estate planning attorney because the disclaimer must meet strict statutory and timing requirements in order to avoid adverse tax consequences. Importantly, once you have disclaimed an inheritance, you cannot change your mind. When You Should Refuse an Inheritance.
November 18, A deed of variation, re-directing qualifying assets to non-exempt persons makes full use of the available BPR. Remember the two-year rule and discuss it with your solicitor as soon as possible after a death if you feel it could be useful. If you need any further information, please contact me at k. Clinical Negligence. Personal Injury. This however, could have tax implications.
The problem with this is that you have no control over where the asset goes. The reasons vary. Often the beneficiary would like the assets—such as a traditional or Roth IRA or other inherited retirement plan—to be given to someone else. Other times the intended beneficiary does not want to be taxed on the assets. A common estate-planning strategy for married couples is for each spouse to leave the other all of their assets to take advantage of the unlimited marital deduction. Doing this will reduce the size of the deceased's estate and eliminate the immediate estate tax upon the first spouse's death.
Note the amount is per person, not per couple. Furthermore, the surviving spouse might not need the inherited money to support their lifestyle, yet the decedent's assets will be included in the survivor's estate at the time of the survivor's death. How can this be avoided? The answer is yes. The technical term is "disclaiming" it. If you are considering disclaiming an inheritance , you need to understand the effect of your refusal—known as the "disclaimer"—and the procedure you must follow to ensure that it is considered qualified under federal and state law.
A qualified disclaimer can be useful in cases where someone has not set up an exemption trust prior to their death. The qualified disclaimer enables the beneficiary to refuse part or all of the assets, rather than to receive them. The assets would then pass to the contingent beneficiary and bypass the estate of the first beneficiary as if the first beneficiary was never named as a beneficiary at all.
In the case of an intestate death, state law will determine the next beneficiary. For tax purposes, disclaiming assets is the same as never having owned them. For these reasons, it's important to follow the precise requirements of a qualified disclaimer. If the primary beneficiary does not follow these requirements, the property in question will be considered a personal asset that they have given as a taxable gift to the next beneficiary in line.
Some states require the disclaimer to include a statement that says the person disclaiming the assets is not subject to any bankruptcy proceedings. Anyone disclaiming assets should seek legal advice on the laws of their state of residence. The person disclaiming the assets does not get to choose who is next in line to receive the disclaimed property.
Instead, the assets will pass to the contingent beneficiary selected by the original owner, as if the first beneficiary had died prior to inheriting the assets. It was an effective wealth transfer method that minimized taxes. This method was especially beneficial for younger beneficiaries who had a long remaining life expectancy, as they could "stretch" the length of time they had to take IRA distributions while allowing the remainder to grow tax-free. This could have been a reason to pass an inheritance to a younger beneficiary in the past.
Under the new legislation , beneficiaries are classified as one of three different categories: eligible designated beneficiaries EDBs , designated beneficiaries DBs , and those not considered designated beneficiaries.
Eligible designated beneficiaries EDBs are anyone designated by the IRA owner who is: 1 their spouse, 2 a minor child ren , 3 a chronically ill individual, 4 a disabled individual, or 5 someone not more than 10 years younger than the IRA owner. Non-person entities such as trusts , charities, and estates are in the third category, not classified as designated beneficiaries. Most non-spouse beneficiaries will, therefore, fall into the second category of designated beneficiaries.
This includes most adult children. Individuals in the DB category must withdraw all inherited IRA funds within 10 years of the death of the original account holder. Additionally, second-generation beneficiaries who inherit in or later are no longer able to "stretch" their distributions, even if the original IRA owner passed away prior to They will instead be subject to the year payout rules.
Therefore, if a beneficiary in the second or third classifications described above is due to receive an inheritance, it may make better financial sense to disclaim the asset if the contingent beneficiary is in the EDB category. For example, assume that John designated his adult son, Tim, as his retirement beneficiary. John passes away in February Although Tim is due to receive the inheritance, he would have to withdraw the funds over the following year period.
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