Adding Flexibility with a Disclaimer Trust

It’s tough to keep your estate plan in tune with the rapid pace of change. The estate tax changes. Your family situation and the value of your assets also change. Any of those factors can trigger a need to change your will or other elements of your estate plan, and the pace of change seems to have increased. A disclaimer trust might be able help.

You don’t want to revise your will for each of these changes, and you shouldn’t have to. Over the years, I have urged you to make flexibility a feature of your plan and showed you how. One way I recommend making your plan flexible is through the language in your will.

A key element of many plans is to leave part of the estate to a credit shelter trust to take advantage of at least part of the lifetime estate and gift tax credit. The amount left to the trust should fluctuate, because of changes in the amount of the credit as well as the value of your estate.

Another way to make your estate flexible is by creating a disclaimer trust.

A disclaimer is when someone renounces or disclaims an inheritance. The tax code has specific rules about disclaimers in section 2518. A person has until nine months after the estate owner’s death to make a qualified disclaimer, and the disclaimer must be in writing.

When you do not have a specific provision in your will, any disclaimed assets would go to the beneficiary of the residual portion of your estate. The residual estate is what is left after specific bequests to people, and the residual beneficiary or beneficiaries receive it. Usually the residual of the estate goes to your spouse or children.

Disclaimed assets don’t have to go to the residual estate, and you might not want them to. You can provide in the will what happens to disclaimed assets, and one option is a disclaimer trust. The disclaimer trust can be a separate trust but it generally is the credit shelter trust or a similar trust.

For example, you could leave the entire estate to your spouse. After your passing your spouse, in consultation with an estate planner, would decide how much of the estate should go into the credit shelter or disclaimer trust. Your spouse would disclaim the appropriate amount, and it would be transferred to the trust to take advantage of the unified credit. Your spouse could even disclaim specific assets.

The advantage of the disclaimer and disclaimer trust is the amount transferred to the credit shelter trust can be fine-tuned. This is a big advantage when the value of your estate and the estate tax credit are fluctuating wildly.  As we discussed in the past, under current law many people should not take full advantage of the estate tax exemption amount, because that would put all or most of the estate in the trust. The surviving spouse would be left with title to few or no assets. The transfer to the credit shelter trust could be fixed at a lower level, but that amount may be inappropriate should the value of the estate change significantly.

I have recommended using a formula in the will to determine the amount put in the credit shelter trust. The disclaimer trust is another option. It lets your spouse set the amount to be transferred to the credit shelter trust to avoid taxes after all the facts are known. Your spouse then would be responsible for reducing or eliminating taxes on the portion not transferred to the trust.

Your estate planning strategy needs flexibility. A formula for the bequest to the credit shelter trust could be used, or you could add a disclaimer trust provision to your will.

January 2010. RW