Can I Refuse to Accept an IRA if I Am Designated as the Beneficiary?

By John Stevens J.D.

Under normal circumstances, beneficiaries are more than eager to collect their inheritance. In some circumstances, however, it can be advantageous for a beneficiary to actually refuse her inheritance. The refusal of an inheritance, often referred to as a “disclaimer,” was not permitted traditionally, but modern law does not force a person to accept a gift she does not want in most circumstances. As with all types of property, a beneficiary may choose to disclaim all or a portion of the proceeds from an IRA, but the beneficiary must decide whether to do so before accepting the money.

Under normal circumstances, beneficiaries are more than eager to collect their inheritance. In some circumstances, however, it can be advantageous for a beneficiary to actually refuse her inheritance. The refusal of an inheritance, often referred to as a “disclaimer,” was not permitted traditionally, but modern law does not force a person to accept a gift she does not want in most circumstances. As with all types of property, a beneficiary may choose to disclaim all or a portion of the proceeds from an IRA, but the beneficiary must decide whether to do so before accepting the money.

Reasons for Disclaiming

A disclaimer can provide a means by which a person who is morally opposed to benefiting from someone’s death can refuse the money. A beneficiary may also want to consider refusing the money if she is concerned that the beneficiary’s creditors may seize the funds. Some states, however, do not permit a beneficiary to refuse an inheritance if the purpose of the refusal is to prevent the beneficiary’s creditors from ultimately receiving the money. A disclaimer is never permitted if the purpose is to avoid a federal tax lien. Perhaps the most common reason for a beneficiary to refuse the proceeds from an IRA is to avoid gift and estate taxes.

Protect your loved ones. Start My Estate Plan

Avoiding Gift and Estate Taxes

Gift tax is an issue for transfers of property during the lifetime of the person making the gift. Although gift tax is usually thought of as a federal tax, some states impose their own gift tax in addition to the federal tax. Unlike gift tax, which imposes a tax on lifetime transfers, estate tax is imposed on the value of a deceased person’s property that exceeds a specified amount at the time of the property owner’s death. A disclaimer may avoid these taxes.

Example of Tax Avoidance

Assume that a father names his adult daughter as the beneficiary of his IRA, and that if she dies before her father, her son stands to inherit the money. Assume also that the daughter is well-off financially, but her son could use some money to start a new business. If the daughter accepted the IRA money and then gave the money to her son, gift tax may be an issue. If the daughter accepted the money but died before giving it to her son, estate tax may be an issue. If the daughter instead refuses to accept the IRA money, the money would instead be distributed to her son without any adverse tax consequences.

Distribution of Disclaimed Property

When a person refuses to accept an inheritance, the law usually treats her as having died before the person who owned the inheritance property. From the above example, because the account holder’s daughter disclaimed the proceeds of the IRA, she was treated as having died before her father. Because the daughter’s son would stand to inherit the IRA should his mother not survive, the son inherited his grandfather’s property. It is important to note that because the beneficiary is treated as having died before the IRA account holder, she cannot determine who then receives the inheritance.

Disclaimer Requirements

The means by which you can properly refuse to accept an inheritance is governed by federal and state law, and variation does exist among the states. Generally, your refusal to accept the property must be in writing and delivered to the administrator of the disclaimed property. The disclaimer must be unconditional, meaning that you cannot have received something in exchange for refusing to accept the property.

Disclaimer Deadlines

You must file the disclaimer on time with the proper authorities as determined under state and federal laws. Federal laws, and some states, require you to file the disclaimer within nine months of the date of death. Other states instead provide that you have nine months from the date you learned of the inheritance to file the disclaimer. A few states do not impose any time restriction.

Protect your loved ones. Start My Estate Plan
Procedures for Disclaiming an IRA Inheritance

References

Related articles

Can a Trust Override a Beneficiary in an IRA Bank Account?

A trust is a legal device by which property is distributed to beneficiaries named in the trust. Although property held in a trust usually does not require probate, trusts are not the only way in which probate can be bypassed. Many assets, including IRA accounts, allow the holder to name a beneficiary that automatically receives the property upon the death of the property owner. Generally, a beneficiary designation will override the trust provisions. There are situations, however, in which the beneficiary designation will fail and the proceeds of the account will pass under the terms of the trust.

Joint Trust Vs. Single Trust

Although a single trust and a joint trust are designed for the same basic purpose of leaving property to specific individuals upon the death of the person or persons who created the trust, there are some differences. The primary distinction between a single trust and a joint trust is the number of people who create the trust and manage the trust property. A joint trust, however, can provide tax relief not offered by a single trust for estates worth a considerable amount of money.

Inherited IRA Beneficiary Management Guide

When someone dies with money still in an IRA, the money passes to the named beneficiary of the account. The Internal Revenue Service has strict rules regarding distributions to beneficiaries. Knowing your options for how to treat your inherited IRA will help with tax planning and avoiding unnecessary penalties.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help.

Related articles

Can a Sole Beneficiary Refuse His or Her Trust?

Turning down a significant gift may seem like a senseless decision. In reality, however, people say "no thank ...

Declination of Interest in Wills

Wills generally describe how you want your assets to be distributed after your death by designating specific ...

How to Refuse to Inherit a House

For various reasons, you may wish to disclaim property that was willed to you by a relative. Beneficiaries may file ...

The Difference Between Inheriting an IRA vs. Assuming an IRA

Planning retirement account expenditures can be hard to pin down, and some people have funds left over when they die. ...

Browse by category
Ready to Begin? GET STARTED