Often, estate plans are all but set in stone. Someone sets up a will or a trust or a joint account and once the T’s are crossed and the I’s are dotted, it is forgotten. Why take the time and expense to constantly update the documents? The problem with this approach is that an estate plan made 20 years ago that will go into effect in another 20 years cannot account for changes in family, changes in estate taxation, or changes in financial situation. What if you could create a plan that allows for some of the decision-making to occur at your death or at your spouse’s death? Disclaimer planning is one such technique that gives estates flexibility in the timing of the decision making process.
Disclaimer planning can be used to give your estate plan flexibility to married couples. Markets and taxes and assets all change over the years. Rather than organizing a new estate plan every time things change, an overall plan that includes disclaimer planning allows you to leave certain, limited decisions to your spouse at the time of your death. For married couples with estates that are close to the current federal estate tax exemption amount now ($11.2 million apiece) or that may be if the federal estate tax exemption is reset as it is scheduled to do in 2026 ($6 million apiece), disclaimer planning is one of the only ways to avoid the federal estate and gift tax while maintaining some flexibility. The idea is to set up the estate plan in such a way that, when one spouse dies, the other can look at the assets and the federal estate tax exemption amount and decide at that time, rather than at the time the documents are executed, how to proceed. Here’s how it works:
First, each spouse puts his or her half of the couple’s assets into a revocable trust and creates a separate Disclaimer Trust. Each revocable trust gives the money to the surviving spouse first, and then to a Disclaimer Trust (the Disclaimer Trust is the contingent beneficiary – the “person” who receives the assets if the spouse disclaims them). For example, when one spouse dies, everything in that person’s revocable trust is set to pass to the surviving spouse.
Now comes the flexibility – the surviving spouse has a choice. The survivor either keeps the assets because the combined estates of both spouses, when the second dies, will not be worth enough to have to pay estate tax OR the survivor disclaims all or some of the assets, to avoid that tax. Whatever the survivor disclaims goes to the contingent beneficiary, the Disclaimer Trust. The Disclaimer Trust can be set up for the benefit of the surviving spouse, but not under his or her direct control, for life, and then to the couple’s children or other beneficiaries. By making the spouse the beneficiary, but not the owner of the assets in the Disclaimer Trust, those assets are not considered part of the surviving spouse’s estate, and therefore not subject to estate tax on his or her death.
If done properly, the result is that the surviving spouse receives the income from the Disclaimer Trust for life and the principal may also be available, using the standard of health, education, maintenance, and support. When the survivor dies, any remaining trust principal goes to the remainder beneficiaries, as part of the trust rather than as part of the survivor’s estate, so it is not counted in the surviving spouse’s estate for estate tax purposes. That estate has been strategically kept below the exemption amounts so no estate taxes are owed.
At a time when the federal estate tax exemption is so high, opting for simplicity is attractive. We are also facing a reduction in the exemption in the next eight years, so coupling simplicity with flexibility through Disclaimer Trust planning can be a win-win. This type of planning must be done correctly so always consult with your tax or estate planning attorney.
Katherine B. Miller, Esq. is a member of the firm of Donahue, Tucker, & Ciandella, PLLC, with offices in Exeter, Meredith, Concord and Portsmouth, New Hampshire. Her practice includes the areas of estate planning, trusts and estates.