When to Look a Gift Horse in the Mouth.

When to Look a Gift Horse in the Mouth – Usually inheriting assets from a decedent’s trust or estate is a good thing that increases a recipient’s net worth.  Sometimes, however, inheriting assets comes at too great a cost.  Let’s consider some examples.

Inheriting real property can come with hidden problems.  If it is contaminated you are liable, under federal laws, as an owner for the rehabilitation of the contaminated property.  The expense associated with such remediation can turn the land into a major liability.  Even if you are one of several joint owners you may be held individually liable for the entire cleanup.  If the land has unpaid tax bills or liens for unpaid debts then you are responsible to pay these off if you want to keep the property.

Anyone inheriting commercial real property, especially, should investigate the prior uses of the property.  Was the property used as a gas station?  Was the property used for manufacturing?  Does the property have any buried oil tanks?  If so, how much will remediating the on-site contamination cost?  Also, are there any off-site damages caused by the onsite contamination for which one may be held liable?

Inheriting a foreign financial account can come with unforeseen federal penalties.  If you are a US trustee or executor of an estate that has direct or indirect financial accounts outside the United States collectively worth more than $10,000 (US dollars) then you are subject to annual Federal Bank Account Reporting (FBAR).  The civil and criminal penalties for negligently or willfully not reporting such accounts are varied and can be very severe; willful non reporting penalties can be up to $10,000 per each negligent non reporting incident.  Willful non reporting penalties are the greater of $100,000 or 50% of the value of accounts not reported.

          The IRS recently issued a publication with new IRS FBAR Penalty Guidance (5/2015), which says that, “For cases involving willful violations over multiple years, examiners will recommend a penalty for each year for which the FBAR violation was willful. In most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.”

Inheriting a timeshare can be a liability when the ongoing timeshare expenses exceed what the timeshare is worth to you.  Is the timeshare one that you can use?  If not, is it at least a timeshare that you can sell or donate to charity (for a tax deduction) without too much time and aggravation?

Fortunately no one is required to accept an unwanted gift.  By acting timely and properly one can “disclaim” assets from a decedent’s estate.  To be valid under state and federal law, a disclaimer has to meet certain requirements:  The beneficiary must sign a written document saying that he or she unconditionally refuses to take part or all of an inheritance and file such disclaimer with the appropriate party in a timely manner, within 9 months of the decedent’s death.  Moreover, the beneficiary must not accept any of the benefits associated with owning the property (e.g., accepting income) or the disclaimer is invalid.  Accepting the benefits can occur very easily, even accidently, and is a common reason why some disclaimers are invalid.

However, the disclaimer may create new complexities.  A disclaimer means that the unwanted gift passes as though the person refusing the gift had predeceased the person making the gift.  Usually people leave their estate to their children by right of representation.  Thus, if a child disclaims his or her share of the estate that share goes to his or her own surviving lineal descendants, in which case disclaimers are also required for each one of these descendants, presuming that no one wants the gift.