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Using A Disclaimer Trust To Help A Surviving Spouse

Many husbands and wives with substantial assets are concerned that their estate may be subject to state or federal estate taxes. You and your spouse may be looking for an estate planning tool that addresses the possibility of estate taxes but also functions just as well even if your estate is not subject to this kind of taxation.

At the law firm of J. Jeffrey Press, P.A., we can help you craft a solution that makes sense for your situation. Call 973-323-2654 to arrange an initial meeting. From our office in Parsippany, we serve clients throughout northern New Jersey.

What Is The Benefit Of A Disclaimer Trust?

We often recommend to married couples creating wills that include language establishing a disclaimer trust. We have found that disclaimer trusts are an attractive tool for clients seeking to reap the asset protection benefits of a credit shelter trust. Moreover, disclaimer trusts allow the surviving spouse to wait until the time of the first spouse’s death to decide whether or not to fund the trust, taking into account the size of the estate and the amount of the state or federal tax exemption at the time the first spouse dies.

The primary benefit of a disclaimer trust is flexibility. It gives the surviving spouse two options:

  1. Accept all the assets he or she is entitled to receive as a result of the other spouse’s death; or
  2. Disclaim (refuse to accept) all or part of the assets and place the disclaimed assets in a trust

What Is The Best Way To Minimize Or Avoid Estate Taxes?

These options are critical in minimizing or avoiding state or federal estate taxes. If at the time of the first spouse’s death the estate is not large enough to be subject to either the federal or New Jersey estate tax, the surviving spouse can take control of the assets and not fund the trust or partially fund it.

If, however, the estate is large enough to be taxed, the survivor can disclaim assets, put them into the trust and thereby avoid taxation. Similarly, even if the surviving spouse’s estate is not large enough to incur estate taxes, but exceeds the exempt amount when assets from the estate of the first spouse are included, the surviving spouse can minimize or avoid estate taxes in her or his estate by disclaiming all or a portion of the deceased spouse’s estate to the disclaimer trust.

The result is flexibility — the survivor can wait until the death of the first spouse to make the decision of whether or not to fund the trust. This allows the survivor to make decisions based on known facts (i.e., whether or not the estate is large enough to be taxed), rather than create an estate plan without knowing for certain.

What Happens To The Disclaimed Assets?

If the surviving spouse executes a disclaimer, then those disclaimed assets are transferred to a trust. The surviving spouse gives up control of the disclaimed assets in favor of a trustee, who is often a bank or a family member. The survivor has the right to receive income from the trust assets for life, but must ask the trustee if at any point more money is needed. The assets remaining in the trust at the death of the surviving spouse are distributed to beneficiaries designated in the will of the first spouse to die, and are not included in the estate of the second spouse to die.

As with most estate planning tools, disclaimer trusts are governed by a complex set of rules regarding their creation and their operation. Our Morris County estate planning lawyers can help you understand all of the nuances, as well as help you decide if the disclaimer trust might fit your goals.

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