How to “Future-Proof” Your Wills and Trusts from Coming Changes in the Law Why a Disclaimer Trust Under Your Will May Be The Best Approach

Are you worried that your Estate Planning will become obsolete if there is a change in the Federal Estate Tax Law? Adding a Disclaimer Trust to your Wills helps to make sure that your plan remains current despite the changing tax laws.

If you’re married, then you’re generally concerned with making sure that both your surviving spouse and children are provided for after your death and that you minimize the payments of any federal estate tax or state inheritance tax.

The unified lifetime exclusion exemption (known as the estate and gift tax exemption) and the marital deduction can, with good advice, provide you with the ability to avoid or minimize the federal estate taxes, but these options still have limitations.

Although the unified exemption for estate and gift taxes was increased in 2019 to $11.4 million per person or $22.8 million for married couples, a great deal of uncertainty remains because the current unified exemptions are scheduled to expire in 2026. It is also possible that after the 2020 elections, the estate tax exemption could be reduced significantly if we have a change in who gains control of Congress and the White House. So, even though the federal estate tax does not apply to your estate now, it could very soon if we have the feared changes in the tax laws.

With property planning, married couples don’t have to race back to their estate planning attorney’s office to update their Wills or Trusts every time the law changes. There are estate planning tools that can be used to help create the necessary flexibility to account for any future changes in the law. The Disclaimer Credit Shelter Trust is one such tool we use to build estate tax flexibility into our clients’ wills and Revocable Trust.

What is a Disclaimer Trust?

A Disclaimer Trust is a technique  that estate planning attorneys use that can be established under a Will as a “testamentary trust” or as a sub-trust in a “revocable living trust.”

When a person makes a disclaimer, it has the effect of treating that person as if he or she died prior to inheriting the assets. So, if a wife disclaims an inheritance from her husband, the wife will be treated as having as if she had died before the husband for whatever amount she ends up disclaiming.

Because the disclaiming spouse is treated as having predeceased the spouse who has died, the disclaimed interest will pass to the next person or entity in line to receive that inheritance. Typically, it will pass to the children. With disclaimer planning, a disclaimer trust will be listed as the successor beneficiary so that we make sure that the inheritance passes to your children.

However, with a Disclaimer Trust, the result will be different because the surviving spouse’s disclaimed share will not pass to the children. It will instead pass to the Disclaimer Trust, where the surviving spouse will have access to the money and assets during his or her lifetime, with the balance only going to the children upon his or her death.

It can provide enhanced asset protections for surviving spouses and possible tax savings for other heirs in a time of uncertainty with our estate tax laws because it gives the surviving spouse the option to elect to create a trust, including a credit shelter trust, after the first spouse dies.

There are several reasons why a surviving spouse may want to do this.

First, if the current unified exemption reverts back to its previous levels—from $11.4 million per person ($22.8 million for married couples) back to approximately $5.7 million per person ($11.4 million for married couples)—the Disclaimer Trust permits any assets beyond the unified credit exemption to pass to the surviving spouse tax-free by using the marital deduction. Otherwise, the amount beyond your unified credit exemption is subject to a 40% tax!

Second, it helps to preserve each spouse’s unified credit exemptions by allowing the surviving spouse to claim the deceased spouse’s unified credit exemption. This means that if you don’t properly claim the exemptions after the death of your spouse, you lose it (i.e., use it or lose it).

It ensure that your assets will eventually pass down to your children in the even the surviving spouse remarries.

Provides divorce, creditor, and asset protection for the surviving spouse.

Additional considerations are involved, including determining who will act as the trustee, how does the surviving spouse access the principal and interest in the trust, and what happens to the disclaimer trust after the death of the surviving spouse.

If you already know you want this, call Lisa, Tammy or Kara at (610) 933–8069 for an appointment and pricing.

Read our other post ("What Happens After I’ve Updated My Estate Planning Documents To Include A Disclaimer Trust?") to learn more about what to do after you have a Disclaimer Trust included in your estate plan.

David M. Frees, III
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Attorney, Speaker and Author
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