A disclaimer trust is a flexible estate planning tool which allows one spouse (“the first spouse”) to leave all of the first spouse’s assets outright to the surviving spouse, but allows the surviving spouse to decide to not accept (i.e., disclaim) all or any portion of the assets.  The estate plan provides that any assets disclaimed pass into a trust for the surviving spouse’s benefit to take advantage of the state estate tax exemption of the first spouse.  Generally speaking, disclaimer trusts are not necessary to take advantage of the federal estate tax exemption of the first spouse due to “portability” of the federal estate tax exemption (there are certain caveats to using portability which are beyond the scope of this article).

ADVANTAGES OF DISCLAIMER TRUSTS

For couples who do not know if their combined assets will exceed the state estate tax exemption but would prefer to leave all assets outright to the surviving spouse, the benefit of this plan is that it gives the couple the most flexibility – the surviving spouse does not have to decide the amount with which to fund the trust until up to nine months after the death of the first spouse, and at that point, the federal and state exemptions will be finite amounts, not moving targets, to consider.  Currently, the maximum federal exemption is $12,060,000 (indexed for inflation – but is scheduled to reduce to around $6,000,000 starting in 2026 if Congress does not act); the maximum Connecticut exemption is $9,100,000 (scheduled to match the federal exemption in 2023); and the maximum New York exemption is $6,110,000 (indexed for inflation). At the time the disclaimer needs to be executed, the surviving spouse will also know the exact value of the couple’s assets. The surviving spouse may serve as sole trustee of this trust and may have certain powers to distribute assets even though the surviving spouse is a beneficiary.

As with any estate planning to use a deceased person’s state estate tax exemption, it is best if a couple’s assets are equally divided so that whoever is the first to die has assets which can be disclaimed.  This might involve a couple having to retitle assets.

BUT I THOUGHT I HAD AN UNLIMITED MARITAL DEDUCTION?

U.S. citizen spouses have an unlimited marital deduction.  However, that is only a deferral of estate tax until the surviving spouse’s death. Suppose the first spouse owns $5,000,000 of assets and surviving spouse owns $5,000,000 of assets. When the first spouse passes away, the first spouse can pass the $5,000,000 to the surviving spouse without any tax due. However, when the surviving spouse passes away, the surviving spouse now owns $10,000,000, which is over the current Connecticut exemption amount of $9,100,000. This means the couple’s family will need to pay tax on $900,000.  However, if the surviving spouse disclaimed $900,000 at the death of the first spouse, the surviving spouse would be able to take advantage of a portion of the first spouse’s exemption, and at the second death, no tax would be due. 

This is extremely important for New York estates because, if the surviving spouse has assets greater than 105% of the exemption, then, on the surviving spouse’s subsequent death, the surviving spouse’s estate loses ALL of the exemption and will pay tax on the full value of the estate.

DISADVANTAGES OF DISCLAIMER TRUSTS

Unlike other types of trusts, a disclaimer trust may not give the surviving spouse a “power of appointment” since the disclaimant may not have certain powers over disclaimed assets.  A power of appointment allows the surviving spouse to change how the trust assets will pass to family members on the surviving spouse’s death, which can add flexibility to the plan.

In addition, once the first spouse dies, the surviving spouse should not assert any control over assets since those assets can then no longer be disclaimed.  Oftentimes, surviving spouses touch the assets before they come to see us after the first spouse dies, and it may then be too late for the surviving spouse to disclaim those assets.  A surviving spouse acting as executor or trustee may, however, take actions to preserve the trust assets.  For more information, please contact Kimberly T. Smith (ksmith@brodywilk.com) or another BW attorney.