When to turn down an inheritance
Perhaps you have heard the story of Wellington R. Burt, a man at one time among the eight wealthiest Americans. Under the terms of his will, the bulk of his estate was not to be distributed until 21 years after the death of his last surviving grandchild. Now, 92 years after his death, 12 of his distant heirs will share his estate, currently valued at around $110 million.
Not all inheritances are quite so large, or quite so unexpected. Nonetheless, the prospect of an inheritance, whether expected or not, can cause us to dream of newly available opportunities — new trucks, new homes, new equipment, family vacations. However, the reality of inheriting money or property often differs from our dreams.
Here are some important factors to consider:
• Should I disclaim it?
While it may seem counterintuitive, there are times when it may be beneficial to “disclaim” an inheritance. To “disclaim” is the legal term for refusing a gift left to you by someone who has passed away.
Most often, individuals will disclaim an inheritance for financial reasons, particularly due to current liabilities they are facing, or if the inheriting beneficiary already has substantial assets and does not want to add to his or her taxable estate.
When an inheritance is disclaimed, the gift passes as though the disclaiming individual had died prior to inheriting. An individual considering whether to disclaim should talk to a qualified estate-planning attorney prior to taking any action. Even small actions, such as accepting an inheritance check, can preclude one’s ability to make a disclaimer.
• What are the tax implications?
Generally speaking, an inheritance — like a gift — does not come with an income tax burden. This is not always true, however. Certain property, such as individual retirement accounts, will require you to pay income taxes. Inheritances generally receive favorable capital gains tax treatment, as well. Even highly appreciated property will likely have a small capital gains tax liability, depending on when it is sold.
Capital gains tax is a tax on the amount an asset has appreciated in value since originally purchased (the original purchase price is known as your “basis” in the property). Inherited items receive a step-up in basis, meaning its value to you is its fair market value at the time of death. Rather than being taxed on the difference between the selling price and the price when originally purchased, your tax liability will be based on the difference between the selling price and the value of the property when you inherited it.
• What is the timeline for receiving the inheritance?
Settling an estate can be a lengthy process, which can depend on a number of factors, including the law firm that is hired to assist the personal representative or trustee. Assets of the estate must be inventoried, debts paid, estate taxes paid (if any are owed), and under certain circumstances, a probate completed by the court. If estate taxes are due, the process may take even longer.
The personal representative or trustee of the estate has nine months to complete an estate tax return, unless he or she files for an extension. The Internal Revenue Service typically issues a closing letter within six months of filing, which informs the trustee that the correct amount of tax has been paid and no estate audit will be completed. The trustee is then free to distribute the assets. If the trustee distributes the assets prior to receiving the closing letter, he or she is personally responsible for any shortfall on taxes.
• How does this inheritance affect my own estate plan?
Anytime you have a change in your health, wealth or family situation, it is a good idea to check in with your estate-planning attorney.
A qualified attorney can help you determine if any changes to your current plan are needed, how the newly inherited assets should be titled, or if other techniques exist to maximize the benefit of your inheritance.
Thompson is a Sioux Falls estate attorney. Contact her at Thompson Law, P.C. Phone 605-362-9100, or visit www.
This article published in the October, 2011 edition of DAKOTA FARMER.
All rights reserved. Copyright Farm Progress Cos. 2011.