Versatile Tax Planning Tool: Wills With Disclaimer Trusts

An overview of “Disclaimer Wills” or “Disclaimer Trusts” as part of a Pennsylvania estate plan.

A “Disclaimer Will”, often 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 surpass the life time exemption amount for federal estate tax, leading to significant tax cost savings to the estate of the surviving partner. Presently, the exemption quantity for 2009 is $3.5 million, and in 2011, the exemption amount will be $1 million. (There is currently no federal estate tax in 2010.) This estate planning tool can efficiently double the exemption amount by protecting the very first to die spouse’s exemption through usage of a trust.
The Disclaimer Will is a standard Will with a trust arrangement that an enduring partner can choose to make use of if the making it through spouse believes that his or her estate might be subject to federal estate tax upon his or her death. The Disclaimer Will normally provides for an outright marital reduction bequest of the entire residuary estate to the making it through partner, and will further supply that if the enduring spouse wishes to disclaim the bequest (in entire or in part), the disclaimed property will be passed into a trust for the advantage of the surviving spouse. The trust will shelter the exemption equivalent of $3.5 million (for 2009) or $1 million (in 2011) from estate tax. This can cause a substantial estate tax savings.

For example, assume Harry and Wendy are a married couple with 2 kids. Their combined estate is $1.5 million. In 2011, if Harry dies prior to 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 kids tax-free through her lifetime exemption. The remaining $500,000.0, the amount exceeding her exemption limitation, will go through federal estate tax. Presuming a tax rate of 55% on that quantity, the estate would be accountable for paying $275,000.00 in federal estate taxes. The net estate passing to the kids is $1,225,000.00.
If, nevertheless, Harry and Wendy set up disclaimer Wills and Harry passes away initially, Wendy can choose to “disclaim” her interest in some or all of the $1.5 million estate. If she disclaims $500,000.00, the disclaimed quantity of $500,000.00 would immediately be positioned 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 kids. The net estate passing to the children is $1,500,000.00.

The Disclaimer Will provides the enduring spouse the flexibility to create a comfortable financial scenario and permit for a significant tax savings. Couples who believe that the Disclaimer Will can benefit them ought to seek the support of a knowledgeable estate planning attorney.