Most of the time when a person is a beneficiary of a trust or will that person will jump at the opportunity to inherit property or assets promised to them in the managing document. This could be a situation where the person has been waiting years to reach a certain age or to see an event finally occur that will open the trust and see some of the money finally start to pour out. However, this does not mean that every person who is a beneficiary under a trust or will fits this description. Rather, some people may prefer to not receive property that had been intended to go to them.
You may be in a position where you have been named as a beneficiary under one of these estate planning instruments but are having second thoughts about whether you would prefer to simply not receive the property that has been allotted to you in the will or trust. Your reasons for not wanting to get the property promised to you can be specific to you and your family. It may be that you would prefer that the property goes to another person who could benefit more than their receipt you could. There are also tax considerations and you do not want to deal with the tax ramifications of receiving property from a will or trust.
If you are wanting to disclaim property or income from a trust, will, or inherited retirement plan then this blog post is for you. The attorneys with the Law Office of Bryan Fagan are going to take some time today to show you just what it means to disclaim trust income and what factors you need to consider when doing so. The effect(s) of your disclaimer as well as the procedures that you will need to follow are important. The last thing that you want to do is to think that you did everything properly as far as the disclaimer is concerned only to find out that you made a mistake somewhere along the way. Those mistakes can cost you time and money. It is best to avoid those mistakes if possible and this blog post will introduce you to some of the most important pieces of information to ponder over as you begin to think about this subject.
Why would you want to disclaim inherited property?
This can be, quite literally, a situation of looking at a gift horse in the mouth. Inheriting property means that another person lists you as a beneficiary in their will or trust. When that person passes away or if a certain triggering action takes place that allows the trustee of the trust to release funds to beneficiaries you need to be aware of what to do next if you do not want to receive that property. This begins with how your status as a beneficiary becomes annulled. You have probably heard of an annulment before regarding a marriage. If you have your marriage annulled, then it is as if the marriage never happened. The same is true if you have your status as a beneficiary annulled. It would be as if you were never designated as a beneficiary by that person or in that trust.
You would not owe any federal taxes on the asset since you would never have collected on the property or even been a valid beneficiary. If the person names a successor beneficiary, then that person would become responsible for paying any federal taxes on the inherited property or asset. For example, let’s say that you are named as the beneficiary of your uncle’s will. You may be doing so well financially that you want to be able to spread the wealth to another person. In that case, you could select your younger cousin to pass the property on. By disclaiming your interest in the property, you could then pass the inheritance down to another member of your family who would stand to benefit more from the property than you would.
However, there are more reasons than simply avoiding the taxes on inherited property that may cause you to want to disclaim your interest in that property you would have stood to inherit. You may be interested in disclaiming assets so that you can simply have another person step into the void and collect the property, as we mentioned a moment ago. This is a very generous step to take and something that you may have thought a great deal about in the lead-up to trying to disclaim the property. However, you need to know that you cannot choose who is going to get the property that would have gone to you. If not you, then the owner of the property would be able to select a secondary beneficiary who would stand to get the property, instead.
Let’s consider a hypothetical example that may be able to better illustrate this point. Take a situation where your uncle Don designates you as the sole beneficiary of the assets in his retirement plan. Your uncle dies five years after doing this. You would be able to inherit the property from your uncle, therefore. However, if you do inherit this property then you would need to pay taxes on it, theoretically. You are receiving financial aid to attend college and are also on a government health insurance plan that is need-based. You’re receiving this income would harm your ability to receive those benefits. As a result, you decide to disclaim the assets. You can go through the process of disclaiming these assets and would be treated as if you had never been listed as the beneficiary in the first place.
Can you disclaim only a portion of the property that you stood to inherit?
One of the questions that our estate planning attorneys receive regularly has to do with whether you can disclaim only a portion of the property that you would stand to inherit. It is possible to do this if your disclaimer meets certain requirements. However, if you attempt to disclaim property and do so incorrectly then you can run into some problems. For example, a disclaimer done incorrectly can stand to be viewed as a gift rather than as a disclaimer. In that event, different tax laws would come into play that could cause you headaches down the road if not handled correctly. Amending tax returns, and paying penalties and fees to the IRS are just a few of the problems that you could run into if your disclaimer is not handled correctly the first time around.
What is a qualified disclaimer?
A qualified disclaimer is a disclaimer that meets all the necessary criteria in federal law to be classified as valid. First, you cannot have accepted any of the property that you could have stood to inherit under the will or trust before you issued the disclaimer. Your disclaimer must be full and unconditional in saying that you disclaim all property that you would have stood to inherit under all circumstances no matter what else is happening or what other conditions may change. This needs to be clearly stated and you could never have had the property in your possession. You must have disclaimed the property and your status as a beneficiary in writing. This could not have been a theoretical disclaimer or a disclaimer that was done orally to the executor of the will or the trustee of a trust. Write down the disclaimer using the terminology that we just mentioned, and you will be in good shape, to begin with.
We have already talked about this, but it stands to mention again that the property that you would have stood to inherit must go to a successor beneficiary without any involvement from you. If you interfere with that process or if it appears that you coordinated the naming of a successor beneficiary or anything like that then this can harm your ability to argue that you properly disclaimed the property in question. You should simply choose not to weigh in on this subject and allow the executor, trustee, or document itself to indicate who to pass the property to. Your job is to disclaim or accept the property.
If it is a retirement account that you stand to inherit you would need to submit your disclaimer to them either nine months after the retirement account owner passed away or nine months after you turn 21 if you are not an adult at the time that the account owner passes away. Whichever of these events were to occur later is when you would need to submit the disclaimer.
Keep track of what you are doing by good and thorough record keeping. We have already talked about how you need to put into writing what you are wanting to do, i.e., to disclaim your interest as a beneficiary. You can probably find forms online that are templates for disclaimers, or you can create a form yourself if you have the time and ability to do this. Many people choose to write a simple letter with clear language about their intent to disclaim the inherited assets. Make sure to review the requirements that we listed above as far as what needs to be in your disclaimer for it to be legal.
Remember that when dealing with a retirement account you are dealing with the retirement account administrator. You can contact the retirement plan to find out if they have a form or other special considerations that need to be made to properly disclaim your interest in the property. There are also tax considerations that you need to pay attention to. If you have a CPA, tax preparer, or financial advisor that you work with then you should talk to him or her to find out if there are special tax considerations that you need to pay attention to. Disclaiming inherited property is complex if you haven’t been able to figure that out yet. Whether it is you or the person that stands to step in as successor beneficiary, tax considerations are at the top of the list of concerns that you should have.
When can you use a disclaimer?
Some people choose to use disclaimers as an estate planning tool. These can be used both before and after a person has passed away. Before the death of an individual, these disclaimers can be utilized to add flexibility to an estate plan given that the person will not know exactly how the future will unfold as far as circumstances are concerned. Estate plan documents are usually drafted alongside the disclaimer so having an experienced estate planning attorney to work alongside you can be a huge advantage for you as far as time and money are concerned. The estate planning documents will specifically make note of the disclaimer and allow for their use after you pass away. An attorney can help you to layer these documents together so that they can work well in combination with one another.
For example, you can include a disclaimer trust in your will to say that disclaimed assets will pass into a trust which will go towards the benefit of your children and spouse who may survive you. Second, a beneficiary designation may be included for a person to step up if another person decides to disclaim their interest in your property. You can list secondary beneficiaries in a wide range of financial assets like retirement plans, IRAs, annuities, or even live insurance policies.
Disclaimers can also be utilized when it comes to matters handled after the death of a person. If you are working on end-of-life planning for yourself or a loved one, then you may be interested to know that planning related to your estate after your passing is common. Different goals can be accomplished with the help of disclaimers. If you have run into problems in drafting estate planning or end-of-life planning documents then a disclaimer can step in and help you to fix those problems, potentially. The best way to correct a problem in estate planning documents is to never have a problem in the first place. However, you can use a disclaimer if there are issues down the road when there is no time to fix the issue such as after you or a loved one has already passed away.
Things change and circumstances do, as well. We see this all the time for the time in between when you create estate planning documents and the time when they start to matter- after you or your loved one have passed away. The laws in Texas and in the United States change from the time when it comes to estate planning matters. Whether it is a tax issue or something different the circumstances under that you drafted and completed your estate planning documents could differ from the current situation- sometimes significantly. If the law is no longer favorable to a particular circumstance in your life, then you may want to update your estate plan via a disclaimer.
As we see all the time, your beneficiaries’ circumstances may have changed, as well. Consider that if your beneficiary has developed a drug problem then allowing him or her to inherit property from you could be disastrous. Giving this person money at this time of their life may be helping them or enable them to feed their addiction. A disclaimer can be used to keep this person from inheriting property from you.
Let’s consider a situation where you die without a will-somewhat unexpected. You have a wife who is a stay-at-home spouse. You have one son who is a young adult with a good-paying job and a stable life. The state of Texas has laws on intestacy which would cover how your property would be divided between your spouse and your son. The issue would be whether your spouse would get enough property out of the estate distribution for her to live on for the rest of her life. She has not worked in years, does not have many transferable skills and her health is not great under this example.
To compensate for these needs your son could theoretically disclaim all or part of his interest in your inheritance so that his mother could inherit even more property from you so that she could live more comfortably in her golden years. However, another issue could be encountered if your children were under the age of 18 or if your children had children- i.e. if you had grandchildren who would effectively be disclaimed, as well. This is more reason to have an experienced attorney assist you in these matters.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of estate planning law and how your family may be impacted by the filing of a probate case.
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Bryan Fagan, a native of Atascocita, Texas, is a dedicated family law attorney inspired by John Grisham’s “The Pelican Brief.” He is the first lawyer in his family, which includes two adopted brothers. Bryan’s commitment to family is personal and professional; he cared for his grandmother with Alzheimer’s while completing his degree and attended the South Texas College of Law at night.
Married with three children, Bryan’s personal experiences enrich his understanding of family dynamics, which is central to his legal practice. He specializes in family law, offering innovative and efficient legal services. A certified member of the College of the State Bar of Texas, Bryan is part of an elite group of legal professionals committed to ongoing education and high-level expertise.
His legal practice covers divorce, custody disputes, property disputes, adoption, paternity, and mediation. Bryan is also experienced in drafting marital property agreements. He leads a team dedicated to complex family law cases and protecting families from false CPS allegations.
Based in Houston, Bryan is active in the Houston Family Law Sector of the Houston Bar Association and various family law groups in Texas. His deep understanding of family values and his professional dedication make him a compassionate advocate for families navigating Texas family law.
