How to decline an inheritance and its consequences
When declining an inheritance the beneficiary gives up their legal or bequeathed right to the inherited property. This means the beneficiary is no longer a shareholder in the decedent’s estate. When a beneficiary declines inheritance, their own heirs substitute the original beneficiary (and become contingent beneficiaries) as if the beneficiary were deceased.
How to Decline an Inheritance?
When declining an inheritance, specific requirements must be met. To decline effectively, one must make a written irrevocable and unqualified refusal to accept the assets. The notice of refusal must be presented either to the person one will inherit while they are still alive or, after the decedent has passed away, to another beneficiary, estate administrator, executor of will or contingent beneficiary. Normally, declination is done by accepting the validity of the will or presenting aforementioned notice of declination.
Effective Declination Helps to Avoid Inheritance Tax
Declination being effective requires that the beneficiary has never received any property they would have inherited. A taxpayer is deemed to have accepted an inheritance if they receive any assets or if they assign someone to act as a contingent beneficiary. In other words, a beneficiary may not decide who the contingent beneficiary is or they risk that the refusal of inheritance is deemed ineffective and they are liable to pay the inheritance tax entirely. And, the person who has received the assets must pay the gift tax, thus there is double taxation. Therefore, it is very important to plan the refusal carefully and follow the word of the law.
Bequeathed Assets May Be Declined in Part
On the contrary of inheritance based purely on the Inheritance Code, one may decline bequeathed property only partially if they so wish, without any negative taxation ramifications. In such cases the inheritance tax will be paid only of the percentage of the assets the beneficiary receives. The beneficiary thus may decide whether they want to accept all the assets that are bequeathed to them, only some percentage of them or if they merely wish to retain the right of possession. If a beneficiary under a will refuses certain assets or a percentage of the inheritance, clauses in the will are followed to determine who the secondary beneficiary is. Should there be no instructions in the will, it may be interpreted in a more general manner in order to figure out who the testator has wished to receive property. If no such person is found the legal beneficiary receives the property that the legatee has refused.
Pros and Cons of Declining an Inheritance
Declining inheritance might be an appropriate measure in cases when there are multiple probates and distribution of property over a short period of time. In such cases transferring inheritance over one generation of family might bring savings in terms of taxes. Declining an inheritance can thus be seen as a form of tax planning. On the other hand, declining an inheritance may be a means to keep the assets within a family. Declining an inheritance may not be contested by creditors in cases of insolvency of the beneficiary has refused the assets before the start of the insolvency or at latest within three months after the beneficiary has been informed of the decedent’s death. Declining an inheritance is also effective against creditors attempting to trigger enforcement of a loan. An effective declination, however, must be made before the decision to begin enforcement.
For example, if we think of a childless couple it may be reasonable for a wealthy widow to refuse any assets to ensure their property stays within the family. On the other hand, if a beneficiary declines the inheritance beforehand, the testator has better chances to bequeath to property via a will (for example if the assets include a business or a farm). This is particularly important in a case where the testator wishes to ensure that a farm or business remains a single entity and has someone to continue its activities. Other beneficiaries demanding for their legal shares of the property might endanger such an asset remaining a single entity.
Translated by Lasse Jelekäinen