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Anthony Battle is a CERTIFIED FINANCIAL PLANNER™ professional. He earned the Chartered Financial Consultant® designation for advanced financial planning, the Chartered Life Underwriter® designation for advanced insurance specialization, the Accredited Financial Counselor® for Financial Counseling and both the Retirement Income Certified Professional®, and Certified Retirement Counselor designations for advance retirement planning.
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Part of the Series Complete Guide to Estate PlanningWills vs. Trusts
Types of Trusts
Your Legal Team
Advice for Heirs
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—such as a traditional or Roth IRA or other inherited retirement plan—to be given to someone else. Other times the intended beneficiary does not want to be taxed on the assets.
A common estate planning strategy for married couples is for each spouse to leave the other all of their assets to take advantage of the unlimited marital deduction. The unlimited marital deduction allows married couples to delay the payment of estate taxes upon the death of the first spouse because after the surviving spouse dies, all assets in the estate over the applicable exclusion amount will be included in the survivor’s taxable estate.
This reduces the size of the deceased's estate and eliminates the immediate estate tax upon the first spouse's death. In 2023, the estate tax exemption (exclusion amount) was $12.92 million and rose to $13.61 million in 2024.
Those amounts are per person, not per couple. And estates can pass the decedent’s unused exemption to their surviving spouse, according to the Internal Revenue Service (IRS). The surviving spouse might not need the inherited money to support their lifestyle, yet the decedent's assets will be included in the survivor's estate at the time of the survivor's death. How can this be avoided?
The answer is yes. The technical term is "disclaiming" it. If you are considering disclaiming an inheritance, you need to understand the effect of your refusal—known as the "disclaimer"—and the procedure you must follow to ensure that it is considered qualified under federal and state law.
A qualified disclaimer can be useful in cases where someone has not set up an exemption trust prior to their death. The qualified disclaimer enables the beneficiary to refuse part or all of the assets, rather than to receive them.
The assets would then pass to the contingent beneficiary and bypass the estate of the first beneficiary as if the first beneficiary was never named as a beneficiary at all. In the case of an intestate death, state law will determine the next beneficiary.
For tax purposes, disclaiming assets is the same as never having owned them; however, it's also possible to disclaim only a percentage of the inherited assets. For these reasons, it's important to follow the precise requirements of a qualified disclaimer. If the primary beneficiary does not follow these requirements, the property in question will be considered a personal asset that they have given as a taxable gift to the next beneficiary in line.
According to the IRS, to use a disclaimer, the person disclaiming the asset must:
Some states require the disclaimer to include a statement that says the person disclaiming the assets is not subject to any bankruptcy proceedings. Additionally, anyone disclaiming assets should seek legal advice on the laws of their state of residence.
The person disclaiming the assets does not get to choose who is next in line to receive the disclaimed property. Instead, the assets will pass to the contingent beneficiary selected by the original owner, as if the first beneficiary had died prior to inheriting the assets.
Before the SECURE Act went into effect in December 2019, beneficiaries of IRAs had the ability to "stretch" IRA distributions over multiple generations. It was an effective wealth transfer method that minimized taxes. Inherited IRAs had required minimum distributions (RMDs) that had to be taken every year, based on the life expectancy of the person who inherited the IRA.
This method was especially beneficial for younger beneficiaries who had a long remaining life expectancy, as they could "stretch" the length of time they had to take IRA distributions while allowing the remainder to grow tax-free. This could have been a reason to pass an inheritance to a younger beneficiary in the past.
The SECURE Act modified the rules around inherited retirement plans considerably for any plan owner who died on Jan. 1, 2020, or later. Under the new legislation, beneficiaries are classified in one of three different categories: eligible designated beneficiaries (EDBs), designated beneficiaries (DBs), and those not considered designated beneficiaries.
An eligible designated beneficiary is anyone designated by the IRA owner who is also one of the following:
Non-person entities such as trusts, charities, and estates are in the third category, not classified as designated beneficiaries. Most non-spouse beneficiaries will, therefore, fall into the second category of designated beneficiaries. This includes most adult children.
Individuals in the DB category must withdraw all inherited IRA funds within 10 years of the death of the original account holder. Additionally, second-generation beneficiaries who inherit in 2020 or later are no longer able to "stretch" their distributions, even if the original IRA owner passed away prior to 2020. They will instead be subject to the 10-year payout rules.
Therefore, if a beneficiary in the second or third classifications described above is due to receive an inheritance, it may make better financial sense to disclaim the asset if the contingent beneficiary is in the EDB category. If they are, they may take distributions over a longer period of time.
Let's assume that Julio designated his adult son, Tim, as his retirement beneficiary. Julio passed away in February 2022. Julio's wife (and Tim’s mother) Priya is still alive, and she is the contingent beneficiary listed in Julio's plan documents. Although Tim is due to receive the inheritance, he would have to withdraw the funds over the following 10-year period.
After speaking to an attorney, Tim decides to disclaim the inheritance so the funds can go to his mother. Priya is then able to take the funds out of the account over a longer period of time using the life expectancy method. This would also be beneficial if she were in a lower tax bracket than Tim—for example, if Tim were in his prime earning years while Priya had already retired.
If you have an IRA and you wish to give your primary beneficiary this added flexibility when they inherit the IRA, you need to plan ahead. You should ask yourself these two questions:
To answer these questions, you'll have to find your will and double-check its contents. Also, don't forget the IRA beneficiary form you filled out when you opened your IRA. The form has spaces for you to name primary and contingent IRA beneficiaries. Check with your IRA custodian to confirm they have the correct information or have your lawyer check on your behalf. It is important to update your IRA beneficiary form as changes occur in your family or your personal situation (e.g., divorce or the death of a beneficiary).
Keep in mind that the disclaimer is irrevocable; the person who disclaims the property can't come back later, after a business fails, for example, or the stock market slumps, and reclaim those assets.
Another estate planning tool that relies on disclaimers is a disclaimer trust. You can use this type of trust to make sure your beneficiary will have an income from the disclaimed property. Assets up to the amount of your available exemption amount can be transferred to the trust after your death, but the surviving spouse has nine months to decide how much to put in the trust, depending on their situation and the inheritance tax laws at that time.
Typically, your surviving spouse will be the income beneficiary of the trust, but they cannot withdraw any principal. Following their death, the trust assets usually pass to the next beneficiary in line, thereby avoiding federal estate taxes along the way.
A disclaimer trust can give your survivors the flexibility they need to deal with shifting exemption amounts, tax laws, family needs, and net worth. Plus, it is a method of post-mortem estate planning that gives you some control over who eventually ends up with your assets. When executed correctly, a qualified disclaimer trust could save a family hundreds of thousands of dollars in federal taxes.
Sometimes, the costs of receiving a gift may be greater than the benefits of the gift, as a result of tax implications. In these cases, refusing the gift may be the tax-efficient thing to do. Trusts, as just described, and qualified disclaimers are used to avoid federal estate tax and gift tax, and to create legal intergenerational transfers that avoid taxation.
As noted above, if an individual makes a qualified disclaimer with respect to an interest in the property, the disclaimed interest is treated as if the interest had never been transferred to that person for gift, estate, and generational-skipping transfer tax (GSTT) tax purposes. Someone who makes a qualified disclaimer will not incur transfer tax consequences because they are disregarded for transfer tax purposes.
Keep in mind that 12 states and the District of Columbia also have estate taxes, and six states have inheritance taxes. Also, your estate has to be sizable for federal estate taxes to kick in: The Tax Cuts and Jobs Act (TCJA) raised the federal estate tax exemption through 2025; in 2024 it is $13.61 million.
There are several additional reasons why a beneficiary may want to disclaim inherited assets:
Let's say, for example, that Nancy designates her daughter Eloise as the sole beneficiary of the assets in her retirement plan. When Nancy dies a few years later, Eloise stands to inherit the money, but if she does, she will no longer be eligible for student aid at college. Eloise decides to disclaim the assets. She therefore properly disclaims the assets and is now treated as if she never were the designated beneficiary.
As explained above, if Nancy previously designated a contingent beneficiary, that person (or entity), would become the successor beneficiary.
An estate tax is levied on the estate of the deceased individual whereas an inheritance tax is levied on the beneficiaries (heirs) of the deceased individual.
A federal inheritance tax does not exist; however, there is a federal estate tax that levies a tax on the estate of an individual. The tax applies to estates with values greater than $13.61 million in 2024. Only the value of the estate above those amounts is taxed.
The estate tax ranges from 18% to 40% depending on the taxable amount. The cap is 40%.
Trusts can be used in estate planning to give individuals and couples greater control over how assets are transferred to heirs with the fewest tax consequences. Sometimes, however, disclaiming assets makes the most sense.
No special form or document must be completed to disclaim inherited assets. A letter usually suffices, providing it meets the requirements listed above. To ensure that any special requests are honored by the custodian/trustee of a retirement account if you are disclaiming those assets, check first with the custodian/trustee regarding the manner in which these requests should be handled.
Talk to your tax professional to find out under which 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.
As with any financial planning decision, it is best to seek the advice of a professional who specializes in this area to avoid making errors that can complicate estate executions. Use the information here as a guide to issues you should discuss and options to consider; it should not be used as legal advice.
