6 Situations When Refusing an Inheritance Is for the Best

A loved one has passed away and left you with an inheritance. At first, you may feel honored, elated, or perhaps nervous. After you allow yourself to feel your emotions, take time to work through the pros and cons of actually accepting the gift.

While an inheritance is a way to build wealth, it may also involve the responsibilities of paying taxes, managing assets, and facing jealousy from family members.

There’s another option worth considering, too. You can disclaim your inheritance. This is a permanent decision, so carefully weigh the potential advantages and downsides.

You may be on the hook for significant taxes if your inheritance isn’t covered by the gift and estate tax exemption (such as transfers between spouses and children and grandchildren).

If you don’t need the money, you might consider turning down the inheritance and letting it pass to the younger heirs in your family. This can allow your family to keep more money instead of losing it to a large tax payment.

Another example is if you inherit a home. Inheriting a home can make you responsible for paying property taxes. If you do not have any plans to live on the property, you may prefer to disclaim this inheritance.

You must make the remaining mortgage payments if you inherit property, such as a house. You’ll also be required to pay property taxes and homeowners insurance. 

Perhaps you’d rather sell the property. In this case, you may owe capital gains tax depending on the sale price.

You’ll need to decide whether or not it’s worth it to live in the home, rent it out, sell it, or even refuse to accept it because you’d rather not deal with the responsibilities of ownership.

Some people inherit a business. Do you want to oversee this business? Instead, you may let it pass to the next heir in your family.

Envy. Disrespect. Unfairness. These are among the many feelings in family members that can be exacerbated when you receive an inheritance.

In addition, certain items being passed to you may make others feel less important or less loved. The reason might not be simply the monetary value but the symbolism or sentimentality of the object.

You may refuse the gift rather than putting yourself through potentially draining emotional drama.

If you believe the money or assets were gained through immoral means, you may feel bad about accepting it. You might instead disclaim the inheritance because of your ethical code.

Your personal belief system is likely very important to you. An inheritance that goes against what you feel is right can impact your emotional well-being. 

Some people might accept the inheritance and use the value to counteract the harm they think has been done during its accumulation.

Others might not want to get their hands dirty by accepting ill-gotten gains to avoid having their consciences weighed down.

Inheriting a large sum of money or valuable assets can be exciting, but it may also disqualify you from government benefits such as Medicaid or disability payments.

For example, did you know you must legally report your inheritance to Medicaid within 10 days? Depending on the value of the income or assets, you may completely lose your Medicaid benefits.

The American Council on Aging provides an example of a woman who receives in-home personal care thanks to Medicaid. In November, she received a $25,000 inheritance, which made her ineligible for Medicaid that month. 

She will also be ineligible for Medicaid in December because her remaining inheritance counts as assets, putting her over the $2,000 asset limit.

There are federal rules for disclaiming an inheritance when you’re on Medicaid. You may want to contact a Medicaid Professional for help.

Financially independent people may disclaim their inheritances to keep their lives simple. However, managing additional assets, such as an inherited home or business, can be complicated and stressful.

In this situation, your choice ultimately depends on whether the additional net worth outweighs the taxes and overall management of the inheritance.

You’re not required to accept an inheritance. Your version of a stress-free retirement may lead you to disclaim assets and money due to additional taxes, management headaches, losing government assistance eligibility, and the potential for family discord.

Knowing you can refuse an inheritance empowers you to make the best decision for you.