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Most people assume that receiving an inheritance is always a good thing, and in many cases, it is. But in my practice, I’ve seen situations where accepting an inheritance outright can create unnecessary tax burdens and long-term planning problems.

There’s a lesser-known strategy that can help families make smarter decisions after a loved one passes: it’s called a disclaimer.

And in the right circumstances, it can be one of the most powerful tools available in estate and tax planning.

What Is a Disclaimer?

A disclaimer is a legal decision to refuse an inherited asset. When properly executed, the asset passes as if the person disclaiming it had predeceased the original owner.

In practical terms, it serves as a legal “no thank you” and allows the inheritance to go directly to the next beneficiary in line, often children or grandchildren.

This isn’t about walking away from wealth. It’s about redirecting it in a more tax-efficient and strategically beneficial way.

Why Would Someone Decline an Inheritance?

The most common reason is tax efficiency.

For example, many people today have significant assets in traditional IRAs. While these accounts grow tax-deferred during life, they come with strings attached after death, especially under current rules requiring most beneficiaries to withdraw the funds within 10 years.

Those withdrawals are taxed as ordinary income.

If the primary beneficiary is already in a high tax bracket, inheriting a large IRA can:

• Push them into even higher tax brackets
• Increase Medicare premiums (IRMAA surcharges)
• Trigger additional taxes like the Net Investment Income Tax
• Reduce certain deductions

In contrast, if the same assets pass to beneficiaries in lower tax brackets, such as adult children or grandchildren, the overall tax burden on the family can be significantly reduced.

A Simple Example

Let’s say a surviving spouse passes away and leaves a large IRA to an adult child in their 50s.

That child is in a high-income-earning phase. Taking required distributions over 10 years could create a substantial tax problem.

However, if that child disclaims part (or all) of the IRA, and the contingent beneficiaries are their own children, the funds pass directly to the next generation.

Those younger beneficiaries may:

• Be in lower tax brackets
• Have more flexibility in timing withdrawals
• Pay significantly less in total taxes over time

The key point: the family keeps more of the inheritance by being strategic about who receives it.

Important Rules You Need to Know

Disclaimers are powerful, but they must be handled correctly.

• Timing is critical: A disclaimer must generally be completed within 9 months of death.
• No benefit allowed: You cannot accept or use the asset before disclaiming it.
• It’s irrevocable: Once you disclaim, you cannot change your mind.
• You don’t control who gets it: The asset passes according to the beneficiary designations or estate documents, not your personal preference.

This is why proper planning on the front end, especially naming contingent beneficiaries, is so important.

Built-In Flexibility for Families

One of the biggest advantages of disclaimers is that they allow for post-death flexibility.

No matter how well an estate plan is designed, circumstances change:

• Tax laws evolve
• Family financial situations shift
• Health and long-term care needs arise

A disclaimer enables families to make smarter decisions based on real-time conditions, not just assumptions made years earlier.

Special Considerations

There are a few situations where extra caution is needed:

• Minor beneficiaries: Inheriting assets may require court involvement or trigger “kiddie tax” rules.
• Charitable planning: Naming a charity as a contingent beneficiary can create powerful tax advantages, especially with IRA assets.
• Long-term care planning: In some cases, disclaimers can intersect with Medi-Cal eligibility strategies, but this requires careful coordination.  Include a hyperlink to the eBook

The Bottom Line

Disclaimers are not for everyone. They require a willingness to give up direct control of an inheritance in exchange for a better overall outcome for the family.

But when used correctly, they can:

• Reduce taxes
• Protect family wealth
• Provide flexibility in uncertain situations
• Improve multi-generational planning outcomes

This is exactly the kind of strategic thinking that separates a basic estate plan from a truly effective one.

If your estate plan includes significant retirement assets, or if you expect to inherit them, it’s worth discussing whether disclaimer planning should be part of your strategy.

Thanks for reading. This is part of our Plan on It  Advanced Estate Planning Series. Stay tuned for more blogs and podcasts on this topic.

Christopher E. Botti, Esq., Certified Specialist in Estate Planning, Trust and Probate Law.

This blog is for informational purposes only and does not constitute legal advice. Every situation is unique, and you should consult with a qualified attorney for advice regarding your specific circumstances.