Disclaimer Trusts 

Purpose: To minimize or eliminate federal estate taxes for a married couple.

How does it work? After the death of the first spouse, the surviving spouse has the option of disclaiming all or part of the estate of the first spouse to die.  The assets that are disclaimed are transferred to the Disclaimer Trust, and are not included in the estate of the surviving spouse when he or she dies.  The disclaimer trust will probably have the same distribution plan as the living trust, but the couple can also specify a different distribution plan for the disclaimer trust.

Why use a disclaimer trust?  Currently the exclusion amount for the estate tax is $5.34 million, but over the years the exclusion amount has changed considerably.  Most estates may be excluded for now, but Congress can always change the law.  For more information, see the Portability Page

What are the problems with disclaimer trusts?  The decision to disclaim must be made within nine months of the date of death, and the person making the disclaimer cannot have received any benefits from the asset being disclaimed.  If the surviving spouse does not remember this deadline, or does not understand it, the disclaimer trust won't work, and, depending on the circumstances, the estate could face heavy taxes. 

What are the benefits of disclaimer trusts?  They are easier to work with than A-B trusts because if a disclaimer trust is not needed to reduce taxes, it is not used.  On the other hand, if an A-B trust is required to be set up by the language of a trust, the trustee has an obligation to established the A-B trust, even if it will not reduce taxes.  The alternative is to spend thousands of dollars to get a court order saying that the A-B trust does not need to be established. 

The advantage of a disclaimer trust, compared to using portability, is that an estate tax return is not required.  That can result in a savings of $2,000 to $3,000 for the estate.