What is the Right Disclaimer Trust for You?
Estate planning is essential for those who want their assets to be managed and distributed according to their wishes. Trusts are an important part of estate planning. However, there are several different types of trusts. What is a Disclaimer Trust? The will or revocable estate trust of a married couple mentions the surviving spouse’s option to use a trust that is only funded if they choose to disclaim assets they inherited from their spouse. This type of trust is flexible and can minimize estate taxes. The surviving spouse has the option to accept or reject assets as part of their inheritance. A disclaimer allows married couples to wait to see what the surviving partner wants to do. The surviving spouse will then be able to assess the situation and decide whether it is best to use a disclaimer. The estate tax is imposed on certain estates when a person dies before the assets are distributed to their beneficiaries. The Massachusetts estate tax exemption will be $2 million as of October 4, 2023 for those who die on or after January 1, 2020. This means that if a person owns $2 million in assets or less, they will not pay estate tax. However, if their estate is valued over $2 million, the estate is taxed on the amount over the $2 million.
There’s also a Federal estate tax. In 2024, the Federal Estate Tax exemption will only be imposed on estates worth over $13.61million, while married couples are allowed to have estates worth over $27.22million. To establish whether your estate will owe a Massachusetts estate tax, the government will look at the fair market value of everything you own at time of your death, including cash, securities, real estate, business interests, trusts, annuities, life insurance proceeds, 401(k)s, and other assets.
Frequently when a spouse dies, they leave everything to the surviving spouse. This is a waste of the $2 million exemption for the first spouse. This transfer will not be taxed because bequests made to a spouse who survives are exempt from estate tax under the rules of marital deduction. They have made no taxable gifts. When Mike dies he leaves all his assets to his wife Sharon. Sharon now owns the assets of both Mike and Sharon, but she only has a $2 million exemption. When she dies, with $3 million of assets, the estate tax will only be applied to that portion of her estate over $2 million. The disclaimer trust is the solution. Assets in the disclaimer trust bypass Sharon’s estate and won’t be subject to Massachusetts estate taxes when Sharon dies.
Advantages of a Disclaimer Trust
It reduces estate tax liability to better provide for the trust beneficiaries.
Assets in a disclaimer trust are generally protected from creditors. Disclaimer trusts tend to be irrevocable. Once assets are placed into the trust, it cannot be changed or revoked. The assets are owned by the disclaimer trust and not the surviving spouse. The assets in the disclaimer can be used by the surviving spouse. Let’s say that the estate plan was created ten years ago. The estate planning back then did not take into account future laws, changes to the economy, or unexpected needs of the surviving spouse. The disclaimer trust allows the surviving spouse to make a decision based on an assessment of the current situation.
Disadvantages of a Disclaimer Trust
The surviving spouse has to act quickly to fund a disclaimer trust, generally within nine months of death, which can be difficult to do during the grieving process. If the surviving spouse doesn’t meet the deadline, this trust will fail to meet your tax planning objectives.
The surviving spouse needs to be competent to fund disclaimer trust and have the capacity to know how to disclaim assets appropriately.
Setting up a disclaimer trust can be complex. You will also need to decide what assets are to be disclaimed. This means that you must consider:
The amount of the estate
The amount of the exemption for estate tax
The likelihood that the value of an estate may change significantly
Any changes in tax laws
- Both partners must trust each other, since the surviving spouse has full control over the assets of both spouses. The surviving spouse could change the estate plan, adjusting what assets go to what beneficiaries.
- How Does a Disclaimer Trust Work?
- After the first spouse dies, the surviving spouse can decide if they want to create a disclaimer trust. Here are the steps for creating a disclaimer trust:
- Select an estate planning attorney to work with.
Figure out what assets should pass to the disclaimer trust.
- Designate the trustee (usually the surviving spouse), any successor trustees, and the beneficiaries.
- Determine the terms of the trust.
- Transfer disclaimed assets to the trust.
- Marital Disclaimer Trust Requirements
- A marital disclaimer trust does have these requirements:
- The surviving spouse can’t accept the assets.
- The surviving spouse can’t provide any direction on the distribution of the assets either before or after disclaiming them.
- The surviving spouse must typically choose to disclaim assets within nine months of the date of death of their spouse.
The deceased spouse’s will or trust must include wording about the marital disclaimer trust for the surviving spouse to be able to disclaim assets during their own lifetime
A marital disclaimer trust can provide a lot of flexibility, but the use of a marital disclaimer trust comes with responsibility. The decision to include a marital disclaimer trust in your estate plan documents is a big one. Is this the best option for me? Our estate planning attorney will meet with you and discuss in detail the estate planning techniques and tools that are best for you. Call us at (617) 730-
