The idea of turning down, or disclaiming, an inheritance may sound absurd to most people, but there are a variety of reasons why disclaiming an inheritance may actually be the most beneficial course of action.
The most common reason why you may wish to disclaim an inheritance is that the tax ramifications of accepting the inheritance are more severe than the benefit gained by the money. This occurs most often between spouses. If, for example, your spouse dies and leaves you an inheritance valued at $4 million. The transfer is tax-free because of the marital deduction; however, if you also have $4 million in assets of your own, then your estate is now valued at $8 million. At the current estate tax exemption limit of $5 million, that means that $3 million will be taxed when you die. Much more will be taxed if the exemption returns to $1 million next year. This means that your beneficiaries will lose millions of dollars to estate taxes.
If, however, you disclaim your inheritance, and the assets pass to the next beneficiary in line–usually children–then your estate avoids incurring estate taxes when you die. This means that your beneficiaries will not lose a substantial amount of assets to estate taxes. If your ultimately plan to pass down all of your combined assets to children, then disclaiming your spouse’s inheritance will actually preserve more of the assets for your beneficiaries.
Talk to your estate planning attorney if you decide that disclaiming an inheritance is in your best interest as the disclaimer must be accomplished using the proper legal procedures to be effective.