Unlikely as it may seem, there are some beneficiaries who prefer not to receive inherited assets. The reasons vary: often the beneficiary would like the assets to be given to someone else; other times the original beneficiary does not want to be taxed on the assets. A beneficiary who properly disclaims inherited assets is treated as if he or she never was the designated beneficiary. (For more, see Mistakes In Designating A Retirement Beneficiary.)

TUTORIAL: Personal Income Tax Guide

If you are considering disclaiming an IRA or other inherited retirement plan, you need to understand the effect of your disclaimer and the procedure you must follow to ensure that your disclaimer is considered qualified under federal and state law.

Reasons for Disclaiming Inherited Assets
If a beneficiary properly disclaims inherited retirement assets, his or her status as beneficiary is fully annulled. This individual, therefore, will not owe federal or estate taxes on the assets. Instead, the successor beneficiary will be responsible for paying any taxes due on the amount.

Disclaiming inherited assets is not only for avoiding taxes. In some instances, beneficiaries disclaim assets so that other certain individuals receive the assets. The beneficiary disclaiming the assets, however, must be aware of the effect of the disclaimer, especially if the intention is to have a particular individual become the successor beneficiary. (Read more, in Designating A Trust As Retirement Beneficiary.)

An Example
Without naming any contingent beneficiaries for his IRA, John, a widower, designates his son, Tim, as the sole beneficiary the IRA. In his will, John also assigns a substantial amount of money from his estate to Tim. A few months after naming Tim as his beneficiary, John remarries, but dies a few years later. John never got around to updating his beneficiary designation to include his new wife, Mary. From conversations they had prior to John's death, Tim knows that John wanted to leave the IRA to Mary. Upon consulting the IRA custodian, Tim learns that the IRA document has a default provision for beneficiary designations. This default provides that if the IRA owner failed to designate a beneficiary, the IRA owner's spouse is the designated beneficiary. Tim, therefore, properly disclaims the IRA assets and is now treated as if he never was the designated beneficiary. Mary, by virtue of the default provision of the IRA plan document, becomes the beneficiary of the IRA.

It is important to note that if John designated a contingent beneficiary, that individual (or entity), rather than Mary, would become the successor beneficiary. The default provision of the plan document comes into effect only if no beneficiary was designated for the IRA; furthermore, not all IRA plan documents have this default option. For instance, plans may default to the estate of the deceased. (For further reading, see Designating A Minor As An IRA Beneficiary.)

Qualified Disclaimers
A beneficiary may choose to disclaim only a percentage of the inherited assets. This is acceptable if the disclaimer meets the certain requirements. A disclaimer that does not meet basic requirements under federal and state law could cause adverse consequences for the person disclaiming the assets and any individuals who are beneficiaries as a result of the disclaimer. The following are the requirements that must be met for a disclaimer to be qualified:

  • The beneficiary must provide an irrevocable and unqualified refusal to accept the assets.
  • The refusal must be is in writing.
  • The document must be submitted to the retirement account custodial at the later of the following times:
    • Nine months after the retirement account owner dies.
    • Nine months after the beneficiary attains age 21 if he or she is 21 when the retirement account owner dies.
  • The beneficiary must not have accepted any of the inherited assets prior to the disclaimer.
  • The assets must pass to the successor beneficiary without any direction on the part of the person making the disclaimer.

Some states require the disclaimer to include a particular statement that says the person disclaiming the assets is not subjected to any bankruptcy proceedings. Anyone disclaiming assets should seek legal advice on the laws of his or her state of residence.

Final Thoughts - Documentation
There is no special form or document that an individual must complete to disclaim inherited assets. A letter usually suffices, providing it meets the above requirements. To ensure that any special requests are honored by the custodian/trustee of the retirement account, an individual disclaiming assets should check with the custodian/trustee regarding the manner in which these requests should be handled.
Talk to your tax professional to find out under what circumstances tax consequences could arise when disclaiming inherited assets. These may not apply to you, but they may apply to the successor beneficiary.

Some disclaimers may require court approval if, for instance, the individual disclaiming the assets is mentally incapacitated or a minor. Beneficiaries who are considering disclaiming assets must seek legal advice to ensure their disclaimers meet federal and state requirements. (For more information, see Gifting Your Retirement Assets To Charity.)

Related Articles
  1. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  2. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  3. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  4. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  5. Retirement

    This Is How You Could Live in Costa Rica for $1,000 a Month

    Explore the cost of living in Costa Rica, and learn how you could sustain a nice middle-class lifestyle for yourself on about $1,000 a month.
  6. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  7. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  8. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  9. Retirement

    What Does It Cost to Retire in Costa Rica?

    Tally up the costs associated with taking your retirement in Costa Rica, and determine whether you have what it takes to live in paradise.
  10. Budgeting

    How to Cost Effectively Spend on Baby Clothes

    Don't let your baby's wardrobe derail your budget. These top tips help you to save money and spend wisely on baby clothes.
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  3. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  6. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!