Estate Tax Planning in an Uncertain Environment

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 couples with estates that are close to $10 million or higher, 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, then to a Disclaimer Trust (the Disclaimer Trust is the contingent beneficiary- the “person” who receives the assets if the spouse disclaims them). When the husband dies, everything in his revocable trust is set to pass to his wife (or vice versa). Now comes the flexibility- the wife has a choice. Either she keeps the assets because she has determined the estate is not worth enough to have to pay estate tax OR she disclaims all or some of the assets. Without disclaimer planning, this choice would have had to be made when the estate plan was created! Whatever she disclaims goes to the contingent beneficiary, the Disclaimer Trust. The Disclaimer Trust can be set up for the benefit of the wife for life and then for the couple’s children.

If done properly, the result is that the wife receives the income from the Disclaimer Trust for her life. She also can use the trust money for her health, education, maintenance, and support. When the wife dies, any remaining trust principal goes to the kids as part of the trust rather than as part of her estate, so it is not counted in the surviving spouse’s estate for estate tax purposes. Her estate has been strategically kept below the exemption amounts so no estate taxes are owed. This type of planning must be done correctly so always consult with your tax or estate planning attorney. DTC Lawyers, with offices in Meredith, Exeter and Portsmouth NH, has estate planning attorneys ready to assist clients with building flexibility into their estate plans.