Have you ever had to deal with a "white elephant"? Not the actual pachyderm, but what Merriam-Webster calls "a property requiring much care and expense yielding little profit" or, more simply, "something of little or no value." Of course, we're not talking about the sort of "white elephants" you might get in a humorous gift exchange over the holidays, like a tacky t-shirt that isn't even your size or an inexplicable kitchen gadget.
Not everyone has a rich uncle who will present them with a simple cash gift in his will. A "white elephant" is a gift that may cause more issues than it resolves, much as an elephant might eat an unwitting recipient out of house and home. It's an asset that comes to you via gift or inheritance and needs to be quickly sold, liquidated, or transferred to avoid further expenses of time or money. In such cases, it is crucial to understand how to disclaim an inheritance properly and avoid holding the burden. The average American household stands to inherit $46,200. Not all those bequeathments are straight cash, and some might prove inconvenient or troublesome.1
There are several reasons why someone might not want to accept an inheritance:
- Income: If the inheritance generates income, such as a business or rental property, it may push you into a higher income tax bracket. This might be good in many cases, but there are situations where this might prove inconvenient, such as—
- Litigation or Bankruptcy: If you face a lawsuit or anticipate bankruptcy, disclaiming the inheritance may be wise. However, it's important to note that if you are currently undergoing bankruptcy proceedings, you may be unable to deny the inheritance.2
- Inability to Maintain: If the inheritance includes property or assets that require ongoing maintenance and you cannot fulfill those obligations, disclaiming may be the best choice. This could be real estate, a business, or perhaps even a literal white elephant.
- Honoring the Decedent's Wishes: Circumstances may have changed since drafting the will, and accepting the inheritance may no longer align with the decedent's original intentions.
Remember, this article is for informational purposes only and does not replace real-life advice, so consult a legal professional before deciding on an inheritance. The article provides high-level considerations, but a legal professional who is familiar with your situation may be able to provide more insights and guidance.
To officially disclaim an inheritance, you must meet the following requirements set forth by the Internal Revenue Service:
- Provide written notice to the executor or administrator of the estate, clearly stating that you are disclaiming the assets and that the decision is irrevocable.
- Submit the statement within nine months of the decedent's death (minors have until they reach the age of majority).
- Ensure that you do not benefit from the disclaimed property, either directly or indirectly. Example: What if you were to live with the new recipient in a house you declaimed? The IRS might perceive this as you benefiting indirectly.
Notably, once you disclaim an inheritance, you have no say in who receives it. The estate will be treated as if you died before accepting it and will go to the contingent beneficiary named in the will. If there is no will, the distribution will resume according to the next person, in line with state law.3
However, disclaiming an inheritance may not be the best choice for individuals receiving Medicaid benefits. If you reject an inheritance while on Medicaid, it could be considered a transfer of assets, potentially making you ineligible for Medicaid for a certain period. It is crucial to seek guidance from a professional with information specific to your situation if you receive Medicaid benefits.
Again, you may not have the choice or inclination to refuse this inheritance. Let's look at a few options open to you.
Donating Assets: Several tax strategies exist for charitable contributions. One method is to donate assets to charity. By doing this, you may be able to manage capital gains taxes and receive an income tax deduction for the full fair market value of the assets.
This is an overview and is not intended as tax or legal advice. Please consult legal or tax professionals for specific information if you want to donate the assets you received as part of an inheritance.
Real Estate: Unwanted land can become a financial burden. Selling land can be difficult if it has been on the market for months or years without any offers. The most common reason for this is that the price is too high. Determining the value of land can be challenging, so setting a realistic price is essential. Another reason for a property's failure to sell is poor marketing. Undesirable features or location can also contribute to a property's inability to sell, as can title issues such as liens or property boundary problems.
If you need help selling your inherited land, there are several strategies you can try. Listing the land for sale online on various platforms can provide maximum exposure. Contacting neighboring property owners may also be effective. Other options include donating the property to a charity. Several charities accept land donations, but they typically have a screening process and often sell land to raise funds for their organizations.
Collectibles: Perhaps the most common of these white elephant inheritances include collectibles, esoteric items that future heirs have no wish to inherit, such as stamps, baseball cards, comic books, figurines, or dishware. The inheritance may also require more thought or consideration, such as an art collection that includes several large canvases or a cache of ephemera, such as old letters that may have historical value and require special preservation.
Most metropolitan areas have resources for liquidating collectibles or helping you get in touch with collectors who might purchase these items wholesale. Holding an estate sale is another common step for quick movement. If you believe you can earn more, you might list these items for sale online. However, in most cases, you may have to decide whether this is worth the effort or whether donating the items to a charity might be simpler.
In short, don't let the elephant gobble up your time and money! Another step, when possible, is to speak to your relative in advance if you anticipate inheriting something you can't handle or don't want. Conversations with your relatives might go a long way toward averting more work later and give them the satisfaction of knowing they are caring for you in the present.
1. Finance.yahoo.com, September 15, 2023
2. NasonLawFirm.com, September 27, 2023
3. GreatAOakAdvisors.com, September 27, 2023
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.