Changing Distributions After Death – Part 3

In my last two posts I have been talking about the challenge of redistributing an inheritance after death. Many people assume that they are free to accept the sum bequeathed to them or not and that is absolutely true.  But as I explained last week, there are tax ramifications, specifically gift tax.

The annual gift tax exclusion can be a way to avoid gift tax but what if the amount to be redistributed is too large?  Let’s say there are two children, A and B.  A wants to give his $300,000 bequest to his brother.  Using the annual gift tax exclusion, it could take 5 to 15 years to complete the gift, depending on whether A or B or both are married.  (See my post last week.)

Another option is for A to disclaim the assets he wants to direct to B.  A disclaimer is a legal statement that A does not wish to receive the inheritance being disclaimed.  A qualified disclaimer – one filed within 9 months of the death of the decedent who made the bequest  – makes it so that the person disclaiming is treated as never having received it for tax purposes.  It is as if that person predeceased – died before – the decedent.  In this way, any gift tax consequences are avoided.

That is not to say, however, that the person disclaiming can direct to whom the amount disclaimed passes.  He cannot.  We must instead look to the will or if there is no will then to the intestacy laws to tell us who receives the disclaimed amount.  If A has children and the will stipulates that if A dies the assets pass to A’s descendants, then each of those possible heirs must disclaim until we get far enough down the line to where B receives the assets.  In some cases that might not even be possible.

That’s why it’s always best to update a will while you are alive rather than leave it to your family to try to carry out your wishes after you pass away.