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Don't Touch That Money!

To the casual observer, an inheritance seems like the best thing in the world. After all, it's unexpected money, a windfall that can help someone catch up on debts or make a big purchase.

Of course, to the actual person getting the inheritance, it's often a far less happy occasion. In many cases, the person had a strong relationship with the deceased, and the last thing on anyone's mind is money. Handling grief and gathering with other family members is the top priority. Moreover, for families who have some estate planning already in place, an inheritance may represent just the final piece of a transfer of wealth that began months or years before.

It may come as a surprise, but if you find yourself entitled to an inheritance, sometimes it's best to choose not to take it. This article discusses a few of the common situations in which such a decision, called a qualified disclaimer, can be your best move.

So I shouldn't take the money?
Once relatively rare, qualified disclaimers have become common in estate-planning documents, especially since the future of the estate tax is currently uncertain. Families that would be subject to estate taxation if a family member were to die tomorrow may not be subject to estate taxation if that family member dies three or four years from now. At the same time, the current version of the law calls for the reimposition of the estate tax in 2011 on a significant number of families who don't have to deal with the tax at the moment. Although most professionals believe that some resolution to this murky state of affairs is inevitable, they have been waiting for more than two years without any answers.

In the past, when the laws governing estate tax were clearer, estate-planning documents often specifically referred to certain provisions in the laws. By including such language, the document could state a person's intent with complete precision. In the current situation, professionals are uncomfortable relying on legal provisions that may change next week or next year. Instead, they choose to include more flexible language that can handle a wider variety of possible changes to the law. The qualified disclaimer is one example of this more flexible language.

How does it work?
In simplest terms, when a person includes qualified disclaimer provisions in estate-planning documents, the named recipients have a choice either to take estate assets for themselves or allow someone else to take them. Although a qualified disclaimer is allowed even without specific language, the benefit of having explicit provisions in the document is that the person can name exactly who will receive the assets if the named recipients choose not to take them.

For instance, consider a married couple with two adult children. In this common situation, most people want their spouses to receive everything if they die. If this is the case, a simple disclaimer provision might say that if the spouse doesn't want to take the money, it will go to the children. In most states and under most situations, this would be the result, even if no explicit provisions were present in the document.

The real value of the qualified disclaimer is that the provision doesn't have to be simple. A recipient under a disclaimer could be a trust set up for the spouse that allows the spouse to receive needed support, but also removes the assets in the trust from the spouse's estate for tax purposes, potentially avoiding a huge estate-tax liability. A disclaimer could also name a trust for grandchildren as a potential recipient, to take advantage of certain tax provisions that apply to transfers across two generations, or generation-skipping transfers. The flexibility of the disclaimer gives professionals significant latitude in finding the best solution for families.

Can I just hold the money for a minute?
In order to make a qualified disclaimer, you must follow a few key rules. Most importantly, if you take any action to obtain possession of your inheritance, you cannot later go back and disclaim that property. For practical purposes, this means that you shouldn't rush to close out bank accounts, cash in certificates of deposit, or sell stocks or bonds in a brokerage account. Even if you are named as a beneficiary on an account, and you have the legal right to take the money without waiting for a probate proceeding, wait until you are certain you do not want to make a qualified disclaimer.

Most states allow a recipient to take up to nine months to decide whether or not to make a qualified disclaimer; after the deadline, disclaiming is no longer an option. Certain other rules apply in particular circumstances.

Talk to the lawyer first
Before making a decision one way or the other, the first step should be to talk to the professional who drafted the estate-planning documents. Often, the success of the entire estate plan hinges on precisely following a series of defined steps to obtain maximum savings and other benefits. Although professionals in these cases will do everything they can to warn their clients about the need for specific action, it's easy to forget in the aftermath of a loved one's death. A good lawyer will help you get through the grief and delicately handle the financial decisions that are required.

It's strange to think that giving up an inheritance may be the smartest thing to do. The qualified disclaimer is just one example of the many situations in which the law is counterintuitive.

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Fool contributor Dan Caplinger welcomes your feedback.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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