Will your estate be subject to estate taxes at the time of your death? That may not be so clear. After all, Congress seems intent to keep changing the estate tax laws. In recent years, the estate tax has been set to apply only to estates that exceed $5 million in value, with an inflationary adjustment that makes the estate tax limit $5.45 million in 2016. But Democrats want to lower the estate tax limit and Republicans want to repeal it altogether. Who knows what the future holds.
That’s where Discretionary Trusts come in. If you have an estate that potentially could be above the estate tax limit when you die (and who knows what that limit will be), then you may benefit from a Disclaimer Trust.
A disclaimer is simply a declaration by the recipient of an inheritance that they don’t want the property. There are a number of rules that apply to disclaimer, but the two you should know is that (1) a disclaimer must be made in writing within nine months of the decedent’s death, and (2) you cannot control where the property goes after you disclaim it.
Legally speaking, you are not obligated to accept a gift. And if you disclaim that gift, you are saying you do not want it and will not take any control over it. By doing so, the gift will pass according to the Trust terms as if you died before the Trust settlor. That means you wash your hands of the gift and you have nothing more to do with it.
In tax planning, we use the disclaimer to our advantage by providing Trust terms that direct the disclaimed assets to a trust (aptly named the Disclaimer Trust), where the assets are held for the benefit of the surviving spouse. This allows the surviving spouse to disclaim assets for tax planning purposes, and then have the assets pass into a Disclaimer Trust to be held for the survivor’s benefit.
If you have ever heard of a Bypass Trust, then you already know what a Disclaimer Trust is. A Disclaimer Trust is just a voluntary Bypass Trust that the surviving spouse can elect to create after the first spouse’s death. Whereas Bypass Trusts are mandatory and must be created after the first spouse’s death.
In other words, a Disclaimer Trust is merely a safety valve that allows the survivor to disclaim whatever portion of the estate would be over the $5.45 million mark after the surviving spouse’s death. Once that determination is made, the assets can be disclaimed, and the Disclaimer Trust is created.
So even though Congress has no idea what it will do with the estate tax limit, you can rest assured that any future estate tax can be properly dealt with and planned for simply by including a Disclaimer Trust in your revocable living trust.