A great deal of thought goes into designating who inherits your assets. Furthermore, establishing a trust to protect your beneficiaries’ best interests is often a complex endeavor. At AmeriEstate, we want to ensure you have the information and tools you need to safeguard your assets for the future.
One question you might ask is: “Can a beneficiary refuse a trust distribution?” Let’s address this valid concern and talk about what measures you can take to keep your assets out of court.
Can a Beneficiary Refuse a Trust Distribution From the Trustee?
Beneficiaries can refuse a trust distribution. Perhaps surprisingly, it isn’t an uncommon occurrence. They have a right to decline an inheritance in whole or in part. However, to do so, they must document their refusals in writing and meet specific criteria to satisfy the Internal Revenue Service.
The Criteria for a Qualified Trust Disclaimer
When beneficiaries refuse a distribution, they give up any rights to or interest in the disclaimed inheritance. Therefore, the federal and state governments won’t consider the inheritance part of the beneficiary’s estate for tax purposes. A qualified disclaimer must meet the following criteria:
- The person refusing the inheritance can’t have received the asset being refused or any benefits from it.
- The beneficiary can’t receive the asset indirectly after refusing it.
- The heir must not have any part in determining who the asset passes to after they reject it.
- The beneficiary needs to deliver the written disclaimer within nine months of your death or after the beneficiary turns 21.
The decision to refuse is irrevocable once the beneficiary submits it to the Trustee.
Why Would a Beneficiary Refuse a Trust Distribution?
Even though it might be counterintuitive, your beneficiary can refuse a trust distribution after you pass. One of the primary reasons your heir might disclaim an inheritance is to avoid paying taxes on it. The IRS considers trust distributions as income when the distribution comes from money the trust earned, not the principal. A significant trust distribution may also be a capital gain, subject to capital gains taxes. In 2023, the tax rate for trust distributions was between 10% and 37%, depending on the distribution’s size.
Other reasons your heirs might decide to refuse a trust distribution include:
- Avoiding changes to their own estate that might complicate estate and tax planning
- Allowing the assets to pass to another heir
- Preventing disqualification from government benefits
- Wishing to maintain income in a lower tax bracket
- Avoiding family issues and conflicts that would arise from accepting the assets
Additionally, if the asset held in trust is real property, your beneficiary might not want the responsibilities that come with owning the property. This type of refusal most often occurs when the asset is real estate, and the heir does not wish to invest in upkeep or incur property taxes. Your beneficiary may also want to avoid selling the property because of the capital gains tax implications.
What Happens to Disclaimed Assets?
Your beneficiary can refuse a trust distribution if they meet the federal government criteria. What happens with the disclaimed assets depends on the steps you’ve taken in setting up your trust. The trust settlement process follows the terms you establish with your successor trustee. However, when an heir officially disclaims all or part of the inheritance in the trust, those assets go to other beneficiaries.
If you set up contingent beneficiaries, the disclaimed assets will go to those beneficiaries as outlined in your trust. Without contingencies, the court decides who gets those assets. A court battle could lead to ongoing conflicts between remaining family members, high court and attorney’s fees and a lengthy trust settlement process. When no legal heirs exist, the court will still determine how to distribute the assets.
What Can You Do To Protect Your Assets?
Before creating a trust, you should communicate with your intended beneficiaries. Let them know what you want to pass on to them and the desired disbursement terms. If the heir is a minor, you can discuss your decision with their guardian. However, minors can decide whether they wish to accept the trust distribution when they come of age.
We recommend that you work with a knowledgeable estate planning attorney to help protect your assets and beneficiaries when setting up your trust. An AmeriEstate attorney can walk you through the process, assisting you in taking steps to protect your legacy. Whether you think any of your beneficiaries would disclaim their inheritances, you should designate contingent beneficiaries.
The contingent beneficiaries will be next-in-line to inherit if your primary beneficiaries don’t inherit for any reason, not just in the event of a disclaimer. The alternatives would also inherit if the primary heirs died before the trust is distributed, can’t be found or are legally barred from receiving the trust assets.
Choosing Contingent Beneficiaries.
Choose your alternate heirs with the same care as your primary beneficiaries; designate them based on who you would want to have your assets if your first choice decides to disclaim the inheritance. Keep in mind that a contingent beneficiary can refuse a trust distribution as well.
Identifying more than one ensures that there is another heir if an alternate does not want to or cannot accept the inheritance. When selecting your contingent heirs, determine who has priority for which assets. You can designate family, friends and charities as your contingent beneficiaries. You will need to include your alternates in your trust as naming them in your will is not valid.
Who Can Help Protect Assets in Case a Beneficiary Refuses a Trust Distribution?
AmeriEstate attorneys are experts in estate planning and can assist with each stage of the estate planning process. We will work with you to ensure your trust reflects your wishes for those who inherit your assets. Our attorneys can also help you set up your trust with contingent beneficiaries to protect your assets and heirs if your primary beneficiaries refuse a trust distribution. Our firm provides personalized services to everyday people, customizing strategies to meet individual needs. Contact us today to receive a free consultation.
Sources:
https://www.investopedia.com/articles/06/refuseinheritance.asp
https://www.law.cornell.edu/cfr/text/26/25.2518-2
https://www.irs.gov/pub/irs-pdf/f1041es.pdf
https://smartasset.com/insights/do-you-pay-taxes-on-a-trust-inheritance