What If I Don’t Want an Inheritance?

The Purpose of Disclaimers and How to Use Them

Although most individuals gladly welcome an inheritance, there are occasions in which one may want to forego part or all of one.  The vehicle by which to do so is known as a disclaimer.

A disclaimer is a post-mortem estate planning device which affords the estate a limited opportunity to alter the distribution of assets following the death of a decedent.  Although an individual can always disclaim the receipt of a full or partial inheritance, such disclaimer will act as a taxable gift unless it is executed, served upon the personal representative and filed with the surrogate’s court within nine months after the decedent’s date of death.

A disclaimer is used for a variety of reasons.  The three primary reasons are : (1) simple generosity, (2) to fund a tax planning trust, and (3) to otherwise minimize the exposure of one’s estate to death taxes.

The first reason is very straightforward.  For example, a parent dies and leaves her estate equally among her own children.  One of the children who does not need or desire the inheritance would rather see it distributed to his own children.  By using a disclaimer, assets that would otherwise pass to him may pass to his children.  (This assumes they are the contingent beneficiaries of their father’s share.)

The second is to fund a tax planning trust.  For example, many married couples execute disclaimer trusts to minimize exposure to federal and state estate taxes.  In New Jersey, the applicable exclusion amount from this tax is currently $675,000.  When one spouse dies, the other can put a portion of the deceased spouse’s estate into a trust for his or her benefit but which will pass tax free to the children or other heirs when both spouses die without being taxed.  In essence, the proper use of a disclaimer trust can shield twice the exclusion amount, or $1,350,000, from this tax.  To do so, assets passing to the surviving spouse can be disclaimed to go into this trust.

The third reason is to minimize an heir’s own estate from tax planning.  If an heir has a taxable estate of their own, they may not wish to add to it.  A disclaimer of an inheritance allows them to do so.

A disclaimer can be used for both probate and non-probate assets.  It can also be used to disclaim future interests.  A disclaimer may be of a full or fractional share.  A disclaimer of a fractional share may be expressed either as a dollar amount or percentage, or any limited interest or estate.  N.J.S.A. 3B:9-2.

Pursuant to N.J.S.A. 3B:9-3, as well as Section 2518 of the Internal Revenue Code, in order for a disclaimer to be effective, the writing of disclaimer must be signed and acknowledged by the person disclaiming and shall: (a) describe the property or interest disclaimed, (b) note the municipality and county of the property if it is real estate, and (c) declare the disclaimer and extent thereof.

In the event the disclaimer is being made on behalf of another decedent’s estate, a minor or an incompetent, such disclaimer may be made by the personal representative or guardian.  However, such disclaimer must be made with the approval of the surrogate’s court controlling the other decedent’s estate or in which the incapacitated person or minor resides.  N.J.S.A. 3B:9-4.

It must be noted that the right to disclaim does not give the disclaiming party a right to appoint a successor party to obtain the disclaimed property or interest.  A disclaimer will act to pass the property or interest to the next party or parties in interest per the will or intestacy statute as if the disclaiming party predeceased the decedent.  As such, it is imperative to ascertain who will be the successor(s) in interest prior to making a disclaimer.  If the party who wishes to disclaim wants other individuals to received the inheritance, he or she will have to accept them first, then make gifts.  This is not a tax free event like a disclaimer though and would be subject to rules regarding gift, estate and inheritance taxes.