Providing Customized Legal Solutions Since 1979

What is a Disclaimer Trust and what are its Pros and Cons?

by | May 23, 2024 | Firm News

A common discussion that we have with married couples is whether a disclaimer trust is an appropriate option in their estate plan.    Part of that discussion is explaining a disclaimer trust and its pros and cons.  This post will summarize that discussion, but it is important to discuss your specific situation with an attorney to make sure a disclaimer trust is appropriate for you.

A quick answer to the question of “what is a disclaimer trust” is that it is a flexible solution for married couples who are not sure if they will need to avoid estate taxes.  The flexibility part is that it allows a surviving spouse to use a wait-and-see approach to the administration of the couple’s trust at the first death between them.  If there is an estate tax concern based on the estate tax exemption amount at the time of the first death and the value of the couple’s assets, then the surviving spouse can implement the disclaimer trust at that time.

The disclaimer trust is technically not created until after the first death of a married couple and the surviving spouse disclaims their interest in assets held by the joint revocable trust.  A disclaimer is a document executed by the surviving spouse within nine months of the first death that specifically identifies assets that are being disclaimed.  The result of the disclaimer is that the surviving spouse is refusing to accept an interest in or power over property.  The terms of the joint revocable trust will provide that the assets that are disclaimed by the surviving spouse then fund a separate disclaimer trust.  The terms for the disclaimer trust are all contained in the joint revocable trust and typically provide that the surviving spouse is the trustee and the sole beneficiary of the disclaimer trust.  The disclaimer trust is irrevocable meaning that the surviving spouse cannot change its terms.  But as the beneficiary of the disclaimer trust, the surviving spouse will receive whatever benefits from the disclaimed assets are allowed by the terms of the disclaimer trust.  Typically, the assets that are not disclaimed will remain in a revocable trust of which the surviving spouse will hold the power to revoke.

The tax benefit to a disclaimer trust is that the assets that fund it are not included in the surviving spouse’s estate when they die.  This is important to avoid the estate paying estate taxes based on the value of the assets in the disclaimer trust.  Most couples do not know what their assets will be when the first spouse dies.  Also, because estate taxes are a hot political issue, the laws governing them are often changed.  So, for estates that may or may not have an estate tax issue, including disclaimer trust provisions in the estate plan offers some flexibility for those potential law changes.  For those estates that it is certain that there will be estate tax concerns or if asset protection is desired by the couple, then bypass trust provisions should be included in the plan.  The difference between the bypass provisions and the disclaimer provisions is that the bypass is mandatory, and the disclaimer is voluntary.

Important aspects to consider regarding disclaimer trusts include these pros and cons:

  • PRO: A disclaimer trust allows a couple to defer decision making until after the first death.
  • PRO: A disclaimer trust gives the surviving spouse the power of choice.
  • PRO: So long as the trust and the power of attorney both allow it, a disclaimer can be exercised by an agent or attorney-in-fact under a power of attorney if the surviving spouse lacks capacity.
  • CON: The surviving spouse needs to be mindful of the nine-month deadline to execute a disclaimer as well as the requirement that for a disclaimer to apply to assets, the surviving spouse should not exercise any powers over the assets intended to be disclaimed.
  • POTENTIAL CON: The couple need to discuss whether disclaimer provisions make sense in their estate plan if they have a blended family since if the disclaimer is not exercised, then all the assets remain in a revocable trust for the surviving spouse.
  • POTENTIAL CON: Implementing and administering a disclaimer trust adds a layer of complexity to the trust administration.

As mentioned above, it is important to discuss with an attorney whether a disclaimer trust is appropriate for your estate plan.  Contact us to discuss your estate planning needs.