The average American won’t have to worry about inheritance-related taxes such as federal estate or gift tax. That’s because they can leave up to $12.06 million without being subject to such taxes.
However, this exemption is a part of a tax policy that adjusts for inflation but is set to sunset after 2025. In 2026, the estate tax exemption may go back down to $5 million. Semantics aside, what is clear here is that tax policies can change swiftly, and the impacts on your estate are uncertain.
If you are a married couple with moderate wealth, these changes prompt a review of your current Estate Plan. Further, it may be time to implement instruments to make your estate as flexible as possible. One useful tool is the Disclaimer Trust. This guide will introduce the basics of this special type of Trust, including what it is, when you would use one, and its advantages and disadvantages. Don’t forget to review our answers to frequently asked questions as well!
What is a Disclaimer Trust?
A Disclaimer Trust is a type of estate planning Trust that allows a surviving spouse to “disclaim” the distribution of certain assets following their spouse’s death. Instead of being distributed outright, these disclaimed, or refused to accept, assets are used to fund an irrevocable Trust.
Each spouse’s Will leaves their estate to the surviving spouse. In addition, it directs that if the surviving spouse were to disclaim any assets, then those assets found can be used to fund a Disclaimer Trust. The use of this Disclaimer Trust by the surviving spouse is completely optional and is intended to provide flexibility for uncertain times. Only spouses have this legal ability to disclaim assets into a Trust and are able to retain benefits.
Here’s an example to help illustrate the Disclaimer Trust definition.
Denver and Dakota are a married couple worth a combined $6 million. Denver passes away, and their assets are passed directly to Dakota, who now owns all assets. Now, let’s say it’s 2026 and the estate and gift tax exemption was just lowered to $5 million. Denver’s death results in a significant estate tax bill.
Now, let’s say that Denver and Dakota both included Disclaimer Trusts in their estate plans. Now, Dakota can disclaim any assets that would have been distributed outright to them. These assets are passed directly to Denver’s Disclaimer Trust for Dakota’s benefit. This keeps the assets out of Dakota’s taxable estate.
When Would You Use a Disclaimer Trust?
Disclaimer Trusts are a great tool to include in your Estate Plan if you are using a “wait and see” approach. They are optional to use, meaning that it won’t hurt you to have one just in case. Because the future can be uncertain, it provides flexibility for married couples who plan to leave the entirety of their estates to one another.
If there is any possible chance that distributing assets outright to the surviving spouse could trigger estate or gift tax consequences, then it would be a wise idea to incorporate an option for the spouse to disclaim some or all of the assets and have them pass directly to a Disclaimer Trust. These assets are still for the surviving spouse’s benefit.
What Are the Advantages of a Disclaimer Trust?
To help you decide whether or not a Disclaimer Trust is the right tool for you and your spouse’s Estate Plan, here are Disclaimer Trust pros and cons to consider.
Let’s start with some of its advantages:
Tax Planning: By using Disclaimer Trusts, married couples with wealth can take advantage of tax exemptions.
Defer Decision Making: The married couple don’t have to decide what should happen to assets now. They can wait until one of them passes and analyze the tax environment at that time before making a decision.
Power of Choice: Disclaimer Trusts allow the surviving spouse to decide whether or not to execute a disclaimer.
Disclaimer can be executed by a POA: If one of the spouses is concerned about the surviving spouse’s ability to properly file a disclaimer, they can instruct to have it executed by the nominated Power of Attorney.
Asset Protection: By passing assets into a Trust and removing them from the surviving spouse’s estate, it provides asset protection should the surviving spouse remarry and get divorced in the future.
What Are the Disadvantages of a Disclaimer Trust?
Although a Disclaimer Trust is associated with a myriad of advantages, there are also some disadvantages to consider:
Missing the disclaimer: A surviving spouse has up to 9 months to execute a valid disclaimer under their state’s laws. This document is typically prepared by an attorney for the surviving spouse to sign. However, it’s entirely possible for the surviving spouse to accidentally miss the deadline to file the disclaimer, or invalidate it by manipulating the assets. This can throw off the plan that was discussed when the deceased spouse was alive.
Risky for remarried couples with children from previous marriages: A Disclaimer Trust can also be risky, especially for remarried couples who have children from previous marriages. There is nothing preventing the surviving spouse from deciding not to file a disclaimer and absorbing the assets outright, or later changing the Trust’s beneficiaries.
Expensive and Complex: Setting up a Trust, especially a special type of Trust, can be complex to navigate and costly to set up. This is a sophisticated estate planning strategy that would usually warrant working with an estate planning attorney. However, if you have millions of dollars of assets to protect, this expenditure and effort should be worthwhile.
Other Common Questions About Disclaimer Trusts
Disclaimer Trusts offers a flexible solution for married couples that are concerned about avoiding estate taxes. If you are considering incorporating a Disclaimer Trust in your Estate Plan, be sure to read the following answers to common questions. These discussions will likely help you get you closer to your decision.
Disclaimer Trust vs AB Trust - What’s the Difference?
The AB Trust was created as a mechanism for a spouse to pass property to their surviving spouse. Their joint assets and property are held in the AB Revocable Trust. The “A” represents the passing spouse and the “B” represents the surviving spouse. When the first spouse passes away, half of their joint assets are placed into an irrevocable Trust. When the second spouse passes away, the irrevocable Trust assets are combined with the second spouse’s remaining assets and are distributed to beneficiaries per the terms of the AB Trust.
A Disclaimer Trust is also intended to pass a married couple’s assets into an irrevocable Trust following the death of one of the spouses. However, a Disclaimer Trust gives more control and flexibility to the surviving spouse. Instead of automatically passing all assets into an irrevocable Trust, the surviving spouse gets to decide how much of the assets should be disclaimed.
In a world where people are living longer and are dealing with increased living and medical expenses, this flexibility could be extremely helpful. It could very well be that the surviving spouse would need more than half of their own assets to support themselves through retirement.
Is a Disclaimer Trust the Same as a Bypass Trust?
A Disclaimer Trust essentially shares the same function as a Bypass Trust. A Bypass Trust is mandatory and must be created after the first spouse passes away. A Disclaimer Trust differs because it is voluntary. The surviving spouse can choose to disclaim some or all of the deceased spouse’s assets and elect to create the Bypass/Disclaimer Trust.
Is a Disclaimer Trust a Credit Shelter Trust?
Yes, a Disclaimer Trust is often referred to as a Credit Shelter Trust. This is because married couples will add in the option for the surviving spouse to disclaim the first spouse’s assets and move them into a Disclaimer Trust. This action makes it such that the deceased spouse’s assets do not become a part of the surviving spouse’s estate. This helps protect the surviving spouse’s exemption from estate and gift tax.
Can a Disclaimer Trust Be Revoked?
Not necessarily. A disclaimer will not be revoked simply because it was based on a mistake or because someone changed their mind within the disclaimer filing period. A judge will likely only revoke a disclaimer if it was created through undue influence.
Create Your Trust Today
A Disclaimer Trust is a special type of Trust that is created as a result of a surviving spouse disclaiming property they inherited from their late spouse. Married couples will mutually include a term in their Will stating that the surviving spouse may disclaim inherited property, which should be passed into the Trust. Although this action is optional, it is often beneficial for the surviving spouse. If the married couple’s joint assets are anywhere near the federal exemptions for estate and gift tax, it would be in their best interest to remove assets from their estate. By disclaiming assets and moving them into a Trust after the death of either spouse, the surviving spouse gets to protect their own tax exemptions.
Note that Disclaimer Trusts are just one type of Trust. If it doesn’t seem like the right fit for you, or you’re curious to see what other options you might have, know that there are different types of Trusts to choose from. Once you’ve selected the Trust(s) you’d like to use, be sure to implement them into your Estate Plan. Here’s how you can create a Trust-based Estate Plan easily through Trust & Will. You can create a fully customizable, state-specific Estate Plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning options.
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