Looking a Gift-Horse in the Mouth: Renouncing a Bequest

Why would anyone lucky enough to be a beneficiary under a will decide to reject the gift being left to them? The law calls this type of rejection a “disclaimer” or “renunciation”—and it’s a very important estate planning tool to consider whether you are administering or are the beneficiary of an estate.

First, let’s consider why someone would renounce a gift. For some people, it is simply a personal preference—for one reason or another, they do not want to benefit from the estate of the decedent. Far more common though, are situations where the intended beneficiary has substantial financial obligations, or is in a position where any inherited property would be at great risk.

For example, imagine your great-aunt named you as a beneficiary in her will and then she unfortunately passed away right on the same day you learned that a collection agency is hounding you for tens of thousands of dollars. In a situation like this, you might expect to be bankrupt within a couple of months. If you accept the bequest from your great-aunt, all or a portion of it may be consumed by your creditors. That’s probably not what your great-aunt would have wanted, so you can renounce the gift, have it go back to the estate and then be paid out to the other beneficiaries.

Most bequests can be renounced, assuming the following criteria are met. The renunciation must:

• Be formally made in writing to the executor or administrator

• Identify exactly what property is being disclaimed (for real estate, you must also identify the municipality, block, lot and precise interest of the beneficiary)

• Be made within a specific time period (See N.J.S.A. 3B:9-4.2)

There are some situations where renunciation is not available. The most common situation is one where the beneficiary has already acted in some way to “encumber” the bequest.

For example, if you borrowed money from someone and the loan was made based on the fact that you were expecting to receive a bequest from your great-aunt (which would be used to pay back the loan), you cannot then renounce the bequest. You are barred by statute and common law from renouncing because doing so would be inequitable to the lender.

Sometimes the beneficiaries of an estate are asked to “waive” their rights to renounce (aka disclaim) bequests. When this happens, the beneficiaries are asked to sign a formal written document that bars them from exercising the right to disclaim in the future. This is common when real property in the estate has been left to multiple beneficiaries or if the beneficiaries are attempting to obtain financing based in whole or in part on an expected inheritance.

One important final issue to consider is the tax consequences of accepting or renouncing a bequest. In some instances, the IRS will not honor a renunciation, and thus it is important to obtain the advice of a qualified estate or tax attorney prior to making any decisions about renunciation. For experienced counsel on estate planning in Hunterdon or Union Counties, New Jersey, contact Alec Borenstein, Esq., by email at alec@bmcestateplanning.com or call 908-236-6457 today.