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Q.: Your piece about the guy who inherited an IRA and wanted to split it with his sisters got me thinking. Do people have to accept an inheritance?
— Ken in Scottsdale
A.: Ken, no one has to accept inherited assets. Inherited assets can be disclaimed. However, most people do not use a disclaimer because they are not entitled to other assets to offset the value of the asset disclaimed and they do not get to decide who gets the disclaimed asset.
Details can be found in Internal Revenue Code §2518 but I’ll cover some basic principles about disclaimers here. Note: I am not a lawyer and I recommend one be consulted for personalized advice. A qualified disclaimer can be filed within nine months of an asset owner’s death. The disclaimer is irrevocable. This irrevocability is easy to run afoul of with accounts like IRAs. IRAs have beneficiary designations and the death claim can be processed without much more than some simple paperwork. As soon as the funds move to an Inherited IRA, disclaiming is no longer an option.
When one disclaims an asset, the asset passes as though the beneficiary had died prior to the date of the benefactor’s passing. For instance, in the case of an IRA it is pretty simple. If you disclaim all or a part of the IRA, the funds pass on based on the beneficiary designation. If the beneficiaries in line to inherit the account are who you would want to inherit the account, disclaiming should get the account to them. If they are not who you want to get the funds, you are in a similar situation to Joe from the Q&A you referenced.
If there are no other beneficiaries and you disclaimed, the money goes to the decedent’s estate. The funds would go through probate and be directed based upon his will. If there was no will, the intestate laws of the decedent’s state determine where the money goes. Running an IRA through an estate is inefficient, time consuming, and adds additional costs beyond the taxes. All these drawbacks can be avoided by properly designating beneficiaries.
Being smart about beneficiary designations can also provide flexibility in an estate plan. For instance, one can set up beneficiary designations to purposely give an inheritor the option to disclaim to other family members. This is often done when the primary beneficiary can disclaim to a family member that is in greater need of funds or is in a much lower tax bracket.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo in Orlando and Melbourne, Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.
