What is a Disclaimer Trust?

A disclaimer trust it a technique for taking a “wait and see” approach to credit shelter planning for married couples.  It differs from a standard credit shelter trust in that it will be used only if it is needed.  The goal is to give the surviving spouse a second look, based on the circumstances that exist after the death of the first spouse. Disclaimer trusts can be incorporated into both will-based estate plans and those that incorporate a revocable living trust.

Here’s how it works:

  • Each spouse’s estate plan has a “Plan A” scenario that disposes of assets as if there is no estate tax.  For most married couples, Plan A typically leaves everything to the spouse outright with alternate distributions to the children or other relatives if the spouse is deceased.
  • The estate plan also includes a disclaimer trust as a “Plan B.”  The disclaimer trust has all of the provisions of a credit shelter trust.  It is usually designed to make the assets available to the surviving spouse while taking advantage of the first spouse’s exclusion amount (credit shelter).
  • After the death of the first spouse to die, the surviving spouse can choose between Plan A (outright to spouse) or Plan B (credit shelter/disclaimer trust).  If there are no pressing estate tax considerations, the spouse can accept Plan A by default. But if there is a need to use Plan B for tax purposes, the spouse can “disclaim” some or all of the assets into the credit shelter/disclaimer trust.

If a disclaimer trust is used, the full extent of the tax planning occurs upon the death of the first spouse.  At that point, the surviving spouse can either accept the trust assets or disclaim them.  If he or she disclaims them into the disclaimer trust, the trust will function like a credit shelter trust that will “shelter” the assets from inclusion in the surviving spouse’s estate.  But if there is no tax reason to use credit shelter planning, the spouse can simply receive the assets outright.  This allows tax-planning flexibility without creating unnecessary complication.

Disclaimer trusts are particularly attractive when, as in the current estate tax environment, there is uncertainty as to what the federal estate tax exemption will be in the future. By the time that the first spouse dies, this question may be answered. At a minimum, the surviving spouse will know the size of the marital estate at at that time. A disclaimer trust allows the spouse to take into account these variables before finalizing tax decisions.

The flexibility of disclaimer trusts is not without a degree of risk.  Tax planning will not happen by default.  If tax planning is needed, the surviving spouse must affirmatively disclaim a portion of the estate.  This puts some responsibility on the surviving spouse to remember to consult with the estate planning attorney after the first spouse’s death.

There is some debate in the estate planning community over whether it is practical to expect the surviving spouse to consult with an attorney or tax advisor and make this decision in the future. We have found that surviving spouses tend to contact us anyway after the death of the first spouse, so this risk is often minimal. And the simplicity and flexibility of a disclaimer trust makes it a good alternative, especially during times of estate tax uncertainty.