September 04, 2021

Disclaimer Trusts: Increased Flexibility in Tax Planning

Disclaimer Trusts allow one’s surviving spouse to choose which assets are held and which are placed in an Irrevocable Trust for their benefit. Depending on the size of the estate and the tax laws at that time—this flexibility can offer meaningful, financial benefits for the surviving spouse.

Why would I need a “Disclaimer Trust?”

A “Disclaimer Trust” can be an effective tool for high-net-worth clients seeking flexibility in their estate plan. Federal estate tax laws are frequently subject to change. (Missouri does not have state-level estate or inheritance tax). Clients below the federal estate tax threshold may still be worried that they will be subject to federal estate taxes by the time of their death. Either through an increase in wealth, changes in law, or a combination of both. Such clients often find Disclaimer Trusts appealing.

How do Disclaimer Trusts work?

Upon the first spouse’s death, a Disclaimer Trust allows the surviving spouse to decide which assets they would like to keep and which to disclaim (as needed to minimize taxes). Those assets which they “disclaim” go into a separate irrevocable Trust for their benefit. The decision of which assets (or how much money) to keep and which to “disclaim” must occur within nine months of the deceased spouse’s death.

The benefit of this approach is that the disclaimed assets (now in an irrevocable Trust) do not count as your property. They belong to an irrevocable Trust and are legally outside your control. However, property and real estate in such a Trust will be available to you for your use and enjoy. Likewise, income from this Trust will typically pay you regular distributions. Despite being reserved for your benefit–the assets of this Trust do not count toward federal estate taxes, government “spend down” requirements, nor are these assets subject to future creditors or lawsuits.

The principal of the deceased spouse’s Trust is used according to the Trustee’s discretion. The Trustee may apply the principal for the survivor’s proper health, support, and maintenance, and to sustain the lifestyle the survivor enjoyed before the deceased spouses’s death. These rules regarding the Trustee’s discretion must be carefully written to avoid being subject to federal estate tax or other liabilities.

Am I required to disclaim assets upon my spouse’s death?

It is important to remember that none of these assets necessarily need to be disclaimed. (e.g. If the estate is not subject to federal estate taxes at the time of the first spouse’s death, the surviving spouse does not need to disclaim anything). Everything can pass directly to the surviving spouse. Again, this is where the flexibility of a Disclaimer Trust comes into play.

What is the difference between “Disclaimer Trusts” and “A-B Trusts?”

The most significant difference between “Disclaimer Trusts” and “A-B Trusts” is that with a Disclaimer Trust, any disclaimer is optional. On the other hand, with an A-B Trust, the deceased spouse’s assets are disclaimed automatically. There is less flexibility when using an A-B Trust than a Disclaimer Trust. For a deeper dive into A-B Trusts, please read our article.

Ultimately, Disclaimer Trusts allow the surviving spouse greater flexibility. They can make a more informed decision about assets and have more options available upon their spouse’s death. Disclaimer Trusts can offer meaningful tax and liability benefits for the surviving spouse.


This article represents the opinion of the author and is intended for educational purposes. This article does not constitute legal advice, nor does it create an attorney-client relationship. One should always consult with an experienced attorney before making estate planning decisions.

Contact Us now

Call, text, or email to speak to an attorney!

Contact Information

Tel: 314-448-0527

Email: dave@lawofficedss.com

Location

75 W Lockwood Ave #1, Webster Groves, MO, 63119, US