5 Things To Know About Waiving Your Right to Inheritance

If it is a matter of taxes, you can keep them at a minimum with proper estate planning. Find other reasons you may decide to waive your right to inheritance and your other options.

What is an inheritance tax?

Inheritance tax is a tax some US states impose on transferring property from a deceased person to their heirs. The states that impose inheritance taxes include Kentucky, Maryland, Iowa, Nebraska, Pennsylvania, and New Jersey.

The tax amount will depend on several factors, including the following:
- Inheritance value
- Relationship of the beneficiary to the decedent
- State where you reside

Beneficiaries with close familial ties to the decedent typically pay lower inheritance taxes than those who are not close relations. For example, Nebraska imposes an inheritance tax of 1% on assets over $40,000 on a parent or child of a decedent. Friends, distant relatives, and those with no lineal connection pay 13% or more for assets valued over $15,000.

 
The Internal Revenue Service (IRS) doesn't impose inheritance taxes on the federal level. It levies an estate tax on the decedent's property if it reaches the minimum value threshold. The filing threshold for 2023 is $12,920,000.
The executor files the estate tax return (Form 706), lists the property included in the estate, declares the property's value, and calculates the estate tax owed. The executor pays the tax from the estate assets before distribution to the heirs.

What are the common reasons for refusing an inheritance?

However, the inheritance tax is not the only financial issue you may face. You will only generally need to pay taxes on real property once you sell it. When you sell an asset you inherited, state and federal governments levy a capital gains tax on the proceeds.

 
Capital gains on inherited assets refer to the increase in value of an asset between the time of acquisition and the time of sale. When a person inherits an asset, the cost basis for the asset is typically reset to the fair market value (FMV) at the owner's death.

 
If the heir later sells the asset, any profit from the sale is subject to capital gains tax. Calculating the tax is on the difference between the FMV at the date of death and the sale price. The tax rate for capital gains may depend on the type of asset and the length of time it was held by the heir.

In many instances, inheritance or capital gains taxes may not be an issue. However, there are other reasons some beneficiaries may decide to sign inheritance tax waivers.

Prevent disqualification from specific government services/aid

After accepting an inheritance, your income and purchasing capacity can improve significantly. This can disqualify you from certain government assistance like Medicaid and student loans.

Avoid hassle

Some inheritances have little value or may require significant efforts to make them viable. Many want to avoid the hassle, so they choose to give up their rights to them.

Prevent change in tax bracket qualification

If the legacy yields income, your income bracket might change. In this case, the percentage of your income you should pay to the IRS might also rise significantly. Some inheritances are not worth it when weighing the benefits against the drawbacks.

Keep the property from seizure

If you have unpaid debts, your creditors might run after you and seize your properties. This could include your inheritance.

A belief that someone else needs it more

Some beneficiaries decide to waive their rights for reasons of altruism. They may wish to give the assets to a family member whose needs outweigh their own.

5 Things To Remember Before Waiving Your Rights to an Inheritance

Waiving your right to an inheritance is a personal choice and easy to do. However, if you're doing it because you're afraid that taxes will eat it all up, think again.

Here are five facts that every devisee, legatee, or compulsory heir should know before disclaiming an inheritance. If you need further help about this, a family lawyer in Brampton can help you understand these technicalities and navigate the entire process.


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1. You can protect your inheritance from taxes

While giving your inheritance away will free you from inheritance taxes, it's not always the way to go. Inheritance is not the same as income. It can only be taxed if you earn from these assets.

To protect them from hefty government fees, include your interest income from dividends and inherited cash in mutual funds or stocks. You can claim losses from these.


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2. Go for the alternate valuation date when computing taxes

Most of the time, the basis of the cost of a specific property is its fair market value at the time the estate owner died. However, executors can select the alternate valuation date. The latter is set at six months after the estate owner’s death.

 
This valuation is only available if the estate tax liability and gross estate amount decrease. As a result, the beneficiaries will receive larger inheritances.

 
However, note that any property you sell within that period will be valued after its sale. If there's no estate tax levied on the estate, the deceased'sdeceased's date of passing will serve as the valuation date.


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3. Encourage the estate owner to set up a trust

If your parents or family member intends to leave their estate to you, encourage them to set up a trust. This will ensure that the assets subject to the inheritance won't go through probate. This exempts you from paying probate-related expenses.

Remind the family member to avoid putting the assets into joint names with you. This can significantly increase the taxes you'll have to pay.

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4. Limit distribution of retirement account

The retirement assets you'll inherit will remain non-taxable until you distribute them. However, a different rule applies if the beneficiary is anyone other than your spouse.

The surviving spouse becomes the deceased's retirement account (IRA) owner if a married person dies. When the surviving spouse reaches 72, the rule on the required minimum distribution will apply.

Suppose you inherited a traditional IRA from someone who isn't your spouse. In this case, you can move the funds to an IRA bearing your name. After which, you can decide how to distribute them. You can choose from the following methods:
- Your life expectancy
- If the deceased was below 72, you could take out all their money within ten years from the year of their death
- Take all the money by the end of the year of the IRA holder's death


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5. Donate some of your inheritance

Donating some of the assets you inherit may seem counterintuitive. However, it's a good way to receive tax deductions and avoid taxable gains on certain appreciated assets.

Consider Your Options Before Waiving Your Inheritance Rights

Can you refuse an inheritance? Yes, you can. However, you don't have to do it to escape paying taxes. You can protect the real and personal properties you inherit by encouraging the executor to choose an alternate valuation date. You can also ask the testators to set up a trust to keep you from paying probate-related expenses.

 
On top of these, you can also limit the instances wherein you distribute your inherited retirement account. Helping a charitable institution and sharing your assets can also reduce the taxes you have to pay.

 
If your reason to refuse an inheritance is for reasons other than taxes, you should still consider your options. Refusing an inheritance may come with unforeseen legal and financial consequences. Consult an estate and inheritance lawyer to find out if waiving your right to inheritance is the most practical choice.