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Disclaimer Planning
by PRINCIPAL Financial Group
Disclaimer trusts are rapidly becoming the primary method estate planners utilize when constructing or amending exemption trust wills. The uncertainty brought on by EGTRRA 2001 has created a resurgence of disclaimers in estate planning. This discusses the important role this technique plays in modern estate planning.
The Background
Advisors have long employed bypass trust wills as a common sense substitute for simple or “I Love You” wills. The rationale being that use of the unlimited marital tax deduction for larger estates in simple wills can waste an exemption amount and lead to unnecessary federal estate taxes.
Most advisors know an exemption trust can result in substantial savings. The estate is divided into two parts, where one part equal to the unified credit exemption amount is placed in the family trust (“B” trust). The other part of the estate, through use of the unlimited marital tax deduction, goes directly to the surviving spouse or a marital deduction trust ( “A” trust). The remaining spouse has substantial rights over the family trust without inclusion in the estate. This same spouse may use his or her own unified exemption amount at his or her death.
The Problem
EGTRRA created a great deal of uncertainty in estate planning. One consequence is the increase in the applicable exclusion amount through 2009, followed by the elimination of the federal estate tax in 2010 and the reinstitution of this same tax in 2011.
Few couples anticipated the tax law becoming so erratic when they initiated their estate planning. Consequently, many surviving spouses with traditional exemption trust wills may be surprised to discover that upon the first death, the lion’s share of their estate may be inadvertently diverted into the family trust. The result is an overfunded “B” trust and a surviving spouse left with an unexpected smaller estate.
The Solution
A properly drafted disclaimer trust gives the surviving spouse power to determine what and how much goes into the exemption trust. Such a trust can function exactly the same as a family trust. The difference is now the surviving spouse has the advantage of knowing exactly the status of the exemption amount and thus how much is necessary to disclaim.
A valid disclaimer must comply with federal and state law. This instrument must be in writing prior to acceptance of the property and be irrevocable. In addition, the disclaimer must be given to the legal holder of the disclaimed property within nine months after the initial transfer.
Summary
Due to their flexibility, disclaimers will be increasingly used in exemption trust planning. A properly drafted exemption trust will, combined with the effective use of disclaimers can provide a basic, simple solution to an otherwise complicated problem.
[PRINTER FRIENDLY VERSION]
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