Can a Sole Beneficiary Refuse His or Her Trust?

By Thomas King

Turning down a significant gift may seem like a senseless decision. In reality, however, people say "no thank you" to inheritances all the time. This includes refusing to accept property from a trust. Simply put, a trust is a legal instrument that requires one individual, the trustee, to hold property for another, the beneficiary. The process by which an individual rejects trust property is called disclaiming. There are several things to take into consideration before turning down such an inheritance.

Timing

Under federal law, the intended beneficiary must unequivocally disclaim the trust property within nine months of the death of the settlor, also known as the party transferring the property. Disclaiming a trust property has the same effect as never having owned it and causes no gift, estate or generation-skipping transfer tax consequences. A disclaimer, however, is irrevocable. Thus, an individual cannot disclaim trust property and later decide she wants it.

Resulting Trust

In general, if a beneficiary disclaims trust property or an express trust fails for any other purpose, the trust property returns to the settlor or his heirs. The result is an equitable reversion by operation of law, more commonly known as a resulting trust. For example, John, the settlor, creates a trust for Susie, the beneficiary, in which John's vacation home, the trust property, will be distributed to Susie upon his death. Upon John's death, Susie refuses to accept the vacation home, because she cannot afford to pay the gift and property taxes. The vacation home reverts to John's estate and passes to his heirs under a resulting trust. Some trust documents may contain language indicating what specifically should happen to trust property if it is disclaimed.

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Anti-Lapse Statute

Most states have anti-lapse statutes. Anti-lapse statutes are designed to deal with the problem that occurs when a beneficiary of a will predeceases the testator. In such an event, an anti-lapse statute allows the willed property to pass to the descendants of the beneficiary. In some states, anti-lapse statutes apply to trusts. For example, John creates a trust in which he leaves his Lamborghini to his friend Bill. Bill dies while John is still alive and is survived by his son, James. Under an anti-lapse statute, James receives the Lamborghini.

Additional Considerations

In addition to unequivocally disclaiming the trust property within nine months of the death of the party transferring the property, a valid disclaimer requires that the beneficiary not accept any property or income from the trust before disclaiming it. The beneficiary also must also refrain from directing how the disclaimed property is distributed. Finally, for the disclaimer to be effective, it must comply with state law which varies by state. For example, some states require disclaimers to be filed with the court, while others simply require that the disclaimer be presented to the trustee.

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References

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