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Say no to a family inheritance? Well, maybe

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in Small Business Tax

Sometimes it makes sense to look a gift horse in the mouth. Suppose you expect a whopping inheritance from an elderly parent, and you plan to pass on Mom’s or Dad’s assets to your children because you don’t need the money.

Strategy: Turn down the inheritance. You can use a “qualified disclaimer” to keep your mitts off the money. Have an attorney provide the necessary paperwork.

If your parents’ assets bypass you on their way to your kids, the family can cut its overall estate-tax bill. Similarly, a disclaimer may save tens of thousands of dollars in estate taxes when a spouse passes away (see box).

Let’s take a closer look: A qualified disclaimer is a written, irrevocable decision by the estate’s beneficiary to refuse all or part of a bequest. The beneficiary must make the disclaimer within nine months of the decedent’s death and before the property has been received. The main object here is avoiding an extra estate-tax bill. Under the current estate-tax rules, a person who dies in 2007 can effectively pass up to $2 million estate tax free to non-spouse beneficiaries. The estate-tax exemption is scheduled to increase to $3.5 million in 2009. Even better: The federal estate tax goes away completely in 2010.

However, unless Congress amends the law, the estate tax will be revived in 2011 with only a $1 million tax-exemption shelter. So you still must plan carefully to avoid dire estate-tax consequences.

Estate-tax dilemma: When you receive an inheritance from a parent, any amount above the estate-tax exclusion is subject to estate tax when you die. Thus, the same assets could be taxed twice, once in your parents’ estate and again in your estate.

A qualified disclaimer avoids that harsh result. Federal estate tax is due only once when the assets pass to your children. If your parents’ estate is worth less than $2 million, no estate tax is due, even if those assets could be worth considerably more upon your death.

Note: Certain transfers that “skip” a generation —such as direct bequests from a grandparent to a grandchild—are subject to a special generation-skipping tax (GST).

Tip: The GST exemption, which mirrors the regular estate-tax exemption, is $2 million for decedents dying in 2007.

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