A “Disclaimer Trust” is a estate planning technique used by married couples in order to reduce or eliminate the estate taxes (federal and state) due upon the death of the surviving spouse (the last spouse to die). A Disclaimer Trust is one of several strategies that can be used in a will to accomplish efficient estate tax planning and should be discussed with an estate planning attorney, particularly if a couple’s assets (including retirement accounts and life insurance proceeds) approach or exceed the state or federal estate tax exemption. The current federal estate tax exemption is $5 million and the Washington state exemption is $2 million (see my post on the Washington state estate tax landscape).
A Disclaimer Trust utilizes at least one, but possibly more, trusts established upon the first spouse’s death to receive the estate’s assets. The most important aspect of a the Disclaimer Trust is the requirement of the surviving spouse to disclaim the appropriate assets into the Disclaimer Trust. By disclaiming a portion of the estate, the decedent’s estate tax exemption is taken advantage of thus reducing the estate taxes due upon the surviving spouse’s death. Both spouses’ wills should state that the surviving spouse shall receive the entire estate (either outright or into a trust), less any specific gifts each wants to make, but gives the surviving spouse the ability to disclaim any of the property into the Disclaimer Trust. The Disclaimer Trust shall provide the surviving spouse with the income generated from the assets and the ability to use principal under certain circumstances but lists others (the children) as the ultimate beneficiaries to receive the trust assets upon the surviving spouse’s death. Since all assets left to a surviving spouse are exempt from estate taxes, the surviving spouse can take advantage of the decedent’s estate tax exemption by disclaiming the property into the Disclaimer Trust which is treated as a gift to the residual beneficiaries who are not the surviving spouse. (See a previous post for some examples of the potential tax savings for a Washington state resident utilizing a Disclaimer Trust.)
The above description is rather technical, but hopefully has conveyed the idea that a Disclaimer Trust is used to leave the assets of the deceased to the surviving spouse while allowing for the use of the decedent’s estate tax exemption through the use of disclaimer which might otherwise be lost. I have summarized the key benefits and drawbacks of a Disclaimer Trust estate planning strategy below:
- Reduce future estate taxes: The purpose of the Disclaimer Trust is to reduce the potential estate tax liability on the estate of the surviving spouse upon her death.
- Maximum flexibility: A Disclaimer Trust allows the surviving spouse to determine which and how many assets to disclaim to maximize the potential tax savings. Since applicable estate tax laws will change over time (either due to changes in the law or changing residence), a Disclaimer Trust provides the most flexibility in determining how best to take advantage of the estate tax rules at the time of the first spouse’s death.
- Choice of assets to disclaim: The surviving spouse can choose which assets to disclaim into the Disclaimer Trust. Generally it is best to disclaim the assets with the greatest probability of appreciation for tax reasons.
- Optional: The Disclaimer Trust provisions are only necessary if the surviving spouse determines that it is necessary to disclaim property for estate tax planning purposes.
- Use of income and principal: Even though the surviving spouse disclaims the property into the Disclaimer Trust, she will still get all income produced by the disclaimed assets as well as access to principal as necessary.
- Prompt action required: The surviving spouse must properly disclaim the appropriate portion of the estate within 9 months of death. Additionally, disclaimer must happen prior to any exercise of control over the property to be disclaimed. It is extremely important for the surviving spouse to discuss their disclaimer options as soon as possible after the death of the first spouse with an estate planning lawyer.
- No guarantee of disclaimer: The passing of property into the Disclaimer Trust which will eventually go to the residual beneficiaries upon the surviving spouse’s death is dependent upon the surviving spouse actually disclaiming some property. There is no way to state how much and which assets should be disclaimed as that defeats the primary benefit of flexibility of the Disclaimer Trust. If there is a desire for the couple to leave a specific amount of assets to residual beneficiaries (possibly children from a previous marriage), then another type of estate planning strategy (such as a Credit Shelter Trust or Family Trust) should be utilized.
- Additional expense: Establishing appropriate Disclaimer Trust provisions in a will should only be done with the assistance of an attorney well versed in estate planning law. Additionally, there will be additional expenses to consult with an attorney after the death of the first spouse to properly determine the best disclaimer actions to take. While this results in additional expenses, the potential tax savings should far outweigh the legal expenses.
If you are a married couple and have assets in excess of $2 million (or might have assets in excess of $2 million upon your death) you should seek estate planning advice on various strategies to reduce the potential federal and Washington state estate tax. A Disclaimer Trust is only one of several strategies that can be utilized for efficient estate tax planning. As every couple’s goals and estates are different, only an estate planning attorney can properly assist in determining the best strategy for your specific needs. If you have any questions on the use of a Disclaimer Trust or to discuss your estate planning needs, please contact Ryan Velo-Simpson, Estate Planning Attorney at 206-660-9401, email@example.com or using the contact request form to the left.