Older savers addressing tax planning for traditional IRAs often overlook the disclaimer, a useful tool for strategically passing an inheritance to a grandchild or child. This can save on taxes and be used with IRAs and other inherited assets, according to a recent article, “When Heirs Are Right to Say ‘Thanks but No Thanks’ to an Inheritance,” in The Wall Street Journal.
A disclaimer is a smart way to provide flexibility after death. They are useful for both retirees and pre-retirees who have traditional IRAs larger than they had expected. These accounts are often a retiree’s largest asset, thanks to diligent savings, 401(k) rollovers and market growth. It’s a great problem to have. However, it can pose problems for savers trying to minimize income taxes. One can even disclaim a portion of a traditional IRA.
Traditional IRAs have minimum required payouts—Required Minimum Distributions (RMDs)—that begin at age 73 and increase annually. These forced withdrawals are taxed at ordinary income rates. They have ripple effects; most notably, they can push savers into higher Medicare income charges (known as IRMAA) and raise the 3.8% surtax on net investment income while shrinking the medical expense deduction. If one spouse dies and the other inherits the IRA, the surviving spouse’s top tax rate can increase.
Disclaimers can help if the heirs are willing to give up money for themselves. Here’s an example: Nana has a large traditional IRA she is leaving for Poppy. At her death, he rolls it into his name, then he dies a year later. Nana’s daughter, Simone, who is in her 50s and in a high-income tax bracket, was originally set to inherit the IRA. If she accepts the IRA, she will have to withdraw all the funds within ten years, which will push her into a higher income tax bracket.
Simone has two young adult children who are in far lower income tax brackets and are listed as “contingent beneficiaries” on Nana’s IRA form. The daughter could disclaim all or part of the IRA, and it would go directly to her adult children. The grandchildren will also face a ten-year withdrawal period, and they’ll need to take annual withdrawals if Nana was already taking them.
The daughter doesn’t have to do a disclaimer. Maybe the grandchildren aren’t responsible enough to handle an inheritance, or she needs the funds herself. The point is, the disclaimers allow post-death moves based on the heir’s current circumstances.
There are time limits for when a disclaimer can be done, set by federal and state laws. In some jurisdictions, the disclaimer must be filed in court. For the disclaimer to be valid, the person disclaiming the assets must not have already benefited from it, for example, by spending dividends from a stock. Once the disclaimer is done, it cannot be reversed.
This is a flexible tool. However, it requires the guidance of an experienced estate planning attorney to ensure that it’s done properly. In addition, the person disclaiming the asset doesn’t have the right to designate the recipient of the disclaimed asset. As far as the law is concerned, once you have disclaimed the asset, you are powerless to make any changes.
Talk with your estate planning attorney to learn if a disclaimer might work for your estate. You may wish to include the family members who are set to inherit the IRA, so they can understand how the inheritance may affect their tax situation. New clients can schedule a free phone consultation to start that conversation with one of our attorneys. Click here to schedule. Current clients can call our office directly.
Reference: The Wall Street Journal (April 3, 2026) “When Heirs Are Right to Say ‘Thanks but No Thanks’ to an Inheritance”
