Although it may seem counter-intuitive to turn down an inheritance, there are situations in which it may actually be beneficial to do so. When a person refuses to accept an inheritance, that person is said to disclaim it, and the effect is the same as if the heir had predeceased the person who died. The gift will pass on to the next person in line to receive it.
One reason to disclaim a gift is when the asset is actually undesirable, for instance a piece of real estate with a low potential sale value but high property taxes. Other gifts may come with strings attached, such as a requirement to get married or to take care of the deceased’s pet.
Another reason for disclaiming an inheritance is for the heir to avoid estate taxes while passing wealth on to his or her own heirs, who may be in a lower tax bracket. Individuals who are already wealthy and potentially facing a significant estate tax may want to disclaim an inheritance, allowing it to pass directly to their children without it ever becoming part of their estate. This may be useful for many types of assets, but disclaiming an inherited IRA may have the additional benefit of passing the asset along to an heir who can stretch out distributions over a longer period.
Disclaiming an asset is not something to take lightly or decided upon spontaneously. Instead, disclaimers can be part of your estate planning process, undertaken only with the advice of a qualified estate planning attorney.