Not all inheritances are welcome.
Suppose you have a judgment against you for $100,000, and your Aunt Debbie dies and leaves you $50,000 in her will.
If you accept your inheritance, then your judgment creditor could take the entire amount and apply it against the $100,000 judgment against you. Not surprisingly, you think that is a bad idea.
What can you do? One idea is to disclaim your inheritance.
Understanding Disclaiming Inheritance
A disclaimer means that you refuse to accept an interest in, or power over, property. It applies to property passing as a result of a host of other mechanisms and:
- Inheritance
- Will
- Survivorship agreement
- Insurance
- Annuity
- Retirement plan
- Contract
If you disclaim the $50,000, then where will the money go? An effective disclaimer will act as though you died before your Aunt. The amount disclaimed vests in your descendants, meaning that your children will receive the $50,000 that was originally left to you.
As a result, your judgment creditor is left without. And because an effective disclaimer means you never accepted an interest in the $50,000, your creditor cannot attack it as a fraudulent conveyance.
When are Disclaimers Ineffective?
Disclaimers do not work in every situation. For example:
- You cannot accept any part of the $50,000 if you want to disclaim the entire amount.
- You cannot have voluntarily assigned, conveyed, encumbered, pledged, or transferred the $50,000.
- If the $100,000 judgment was for child support, then a disclaimer is not effective.
- If you sign a written waiver of your right to disclaim, then you cannot later disclaim.
- A disclaimer cannot defeat a federal tax lien or a claim in a pending bankruptcy.
So much for Texas law: you can also follow certain procedures and make the disclaimer “qualified” under the Internal Revenue Code. That means the IRS will treat the $50,000 as if you had never received it.
Different Ways to Use a Disclaimer
Tax-Planning Tool
Disclaimers can be used as a tax-planning tool. It is a common tactic when a surviving spouse wants to take advantage of the deceased spouse’s applicable tax-planning tool.
If that last sentence sounded like gibberish, then ask your friendly tax attorney to explain.
As a Trustee
Disclaimers are not just available to individuals. Trustees can disclaim an interest in property that otherwise would have become trust property. A holder can disclaim a power of appointment. A fiduciary can disclaim a power that he would otherwise have been given.
Common Questions About Disclaimers
Is it Simple to Make a Disclaimer?
Yes. Is it simple to make an effective, qualified disclaimer? No.
For example, Chapter 240, Subchapter 6 of the Texas Property Code, has 11 sections that describe how and to whom different types of disclaimers must be delivered. If it is not properly delivered, then a disclaimer is ineffective.
When Do You Need to Make Your Disclaimer?
Here is a place with the Tax Code and Texas law differ.
If you are making the disclaimer under the tax code to avoid gift tax, then it must be made within nine months after Aunt Debbie’s death, or within nine months after a revocable transfer becomes irrevocable. If your disclaimer is merely under Texas law, then there is no deadline, with an important caveat: if you wait too long, then you may do something that makes disclaiming the interest impossible. This includes taking possession of any part of the $50,000 or exercising dominion and control over the interest.
Hammerle Finley is Here to Help With Disclaimers
Disclaimers can be a good solution to a number of problems with an inheritance. They are not, however, a good solution for every inheritance problem. If you have questions about disclaimers, schedule a consultation with our team of expert attorneys before disclaiming any kind of interest.
Your Aunt Debbie would be proud.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
