By FPA member Richard Durso, CFP®
Last Updated: September 12, 2011
Due to estate law uncertainty, a flexible estate plan is a must. If you are a married couple with a combined estate of $10 million or less ($5 million for each spouse), you might want to consider a Disclaimer Trust. This allows the surviving spouse to disclaim assets for tax advantages and receive income and principal from the Trust.
Your will would be set up like an “I Love You” will where your surviving spouse inherits all of your assets, but it also contains provisions for the potential establishment of a Disclaimer Trust. The Disclaimer Trust may or may not be utilized and gives the survivor flexibility for postmortem planning. At the time of death, the surviving spouse has the option to choose to take ownership of the assets or let all or a portion of the assets pass to the Disclaimer Trust. The disclaimed portion is usually equal to or less than the unified credit amount for the year of the decedent's death. The unified credit is the amount that can pass to heirs free of federal estate tax. The credit is $5 million for 2011 and 2012, but set to revert to $1 million in 2013 unless Congress acts.
By adding Disclaimer Trust provisions to your will, the surviving spouse can fully examine the entire set of circumstances surrounding the combined estate at the time of the first spouse's death. The surviving spouse may choose to disclaim only a portion of the estate and keep the remainder free of trust and just retain all of the property. The utilization of the Disclaimer Trust will be dependent upon the unified credit and your financial situation at the time of death.
The Disclaimer Trust gives the surviving spouse the benefit of property without having the property taxed at his or her death. The surviving spouse would be entitled to the income from the trust as well as have the ability to withdraw principal.
Be aware that the surviving spouse cannot disclaim assets over which he or she exerts control after the first spouse’s death. If you choose to utilize the Disclaimer Trust, assets must be disclaimed in writing within nine months without taking any control/ownership/use of the assets. For example, if the surviving spouse inherits a brokerage account, they cannot place any stock trades or take money out, then decide that they want to disclaim.
Ensure that you name at least two successor executors as well as successor trustees for the Disclaimer Trust. Consider naming a corporate trustee or co-trustee to provide tax preparation, administrative duties and objectivity. A corporate trustee also provides continuity since the trust company will continue to do business while illness and death may prohibit individual trustees. It may be advisable to update your contingent Individual Retirement Account (IRA) beneficiaries to the Disclaimer Trusts. In that manner, any assets that are disclaimed by the primary beneficiary (spouse) would pass to the trust. Be aware that IRA, annuity, and retirement assets will pass via beneficiary designation and not via the will (unless the estate or trust is the beneficiary). In conclusion, make an appointment with an estate attorney to determine if a Disclaimer Trust is right for you.
FPA member Richard Durso, CFP®, is a Financial Planner with RTD Financial Advisors, Inc. in Philadelphia, Pa.