Use of Disclaimers in Estate Planning

A “Disclaimer Will”, sometimes referred to as a “Disclaimer Trust”, is a flexible estate planning tool that can be implemented to benefit married couples whose combined estates are approaching or exceed the lifetime exemption amount for federal estate tax, resulting in substantial tax savings to the estate of the surviving spouse. Currently, the exemption amount is unlimited but in 2011, the exemption amount will be $1 million.  This estate planning tool can effectively double the exemption amount by preserving the first to die spouse’s exemption through use of a trust.

The Disclaimer Will is a standard Will with a trust provision that a surviving spouse can elect to utilize if the surviving spouse believes that his or her estate could be subject to federal estate tax upon his or her death. The Disclaimer Will typically provides for an outright marital deduction bequest of the entire residuary estate to the surviving spouse, and will further provide that if the surviving spouse wishes to disclaim the bequest (in whole or in part), the disclaimed property will be passed into a trust for the benefit of the surviving spouse. The trust will shelter the exemption equivalent of $1 million (in 2011) from estate tax. This can lead to a huge estate tax savings.
For example, assume Harry and Wendy are a married couple with two children. Their combined estate is $1.5 million. In 2011, if Harry dies before Wendy, without a Disclaimer Will, Wendy will have an estate of $1.5 million (there is no federal estate tax for transfers between spouses). Upon Wendy’s death, assuming her Will distributes her entire estate to her children, $1 million will pass to the children tax-free through her lifetime exemption. The remaining $500,000.0, the amount exceeding her exemption limit, will be subject to federal estate tax. Assuming a tax rate of 55% on that amount, the estate would be responsible for paying $275,000.00 in federal estate taxes. Therefore, the net estate passing to the children is $1,225,000.00.

If, however, Harry and Wendy set up disclaimer Wills and Harry dies first, Wendy can elect to “disclaim” her interest in some or all of the $1.5 million estate. If she disclaims $500,000.00, the disclaimed amount of $500,000.00 would automatically be placed in trust for Wendy’s benefit. Upon Wendy’s death, her $1 million estate would pass tax-free to the children through her lifetime exemption and the trust amount of $500,000.00 would also pass tax-free to the children. Therefore, the net estate passing to the children is $1,500,000.00.

The Disclaimer Will provides the surviving spouse the flexibility to create a comfortable financial situation and allow for a substantial tax savings. Married couples who believe that the Disclaimer Will can benefit them should seek the assistance of an experienced estate planning attorney.