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 $5.12 million, but that
amount is part of a two-year bill that expires at the end of 2012. If
Congress fails to reach agreement on an extension of the $5.12 million
exclusion, the exclusion will go back to its 2001 level of $1 million.
Estates that seem to be free and clear of the estate tax would pay
substantial taxes if the surviving spouse died in 2013 or later. 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.
