Flexible Tax Planning Tool: Wills With Disclaimer Trusts

A summary of “Disclaimer Wills” or “Disclaimer Trusts” as part of a Pennsylvania estate plan.

A “Disclaimer Will”, sometimes described as a “Disclaimer Trust”, is a versatile estate planning tool that can be carried out to benefit married couples whose combined estates are approaching or exceed the lifetime exemption amount for federal estate tax, resulting in considerable tax savings to the estate of the making it through partner. Currently, the exemption quantity for 2009 is $3.5 million, and in 2011, the exemption quantity will be $1 million. (There is presently no federal estate tax in 2010.) This estate planning tool can effectively double the exemption amount by protecting the very first to die spouse’s exemption through use of a trust.
The Disclaimer Will is a basic Will with a trust provision that an enduring spouse can elect to use if the enduring partner believes that his or her estate might be subject to federal estate tax upon his or her death. The Disclaimer Will typically offers for an outright marital reduction bequest of the entire residuary estate to the surviving partner, and will further provide that if the surviving partner wishes to disclaim the bequest (in entire or in part), the disclaimed property will be entered a trust for the advantage of the enduring partner. The trust will shelter the exemption equivalent of $3.5 million (for 2009) or $1 million (in 2011) from estate tax. This can lead to a big estate tax savings.

Flexible Tax Planning Tool: Wills With Disclaimer TrustsFor example, presume 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 partners). Upon Wendy’s death, presuming her Will distributes her whole estate to her children, $1 million will pass to the children tax-free through her life time exemption. The staying $500,000.0, the quantity exceeding her exemption limit, will be subject to federal estate tax. Presuming a tax rate of 55% on that amount, the estate would be responsible for paying $275,000.00 in federal estate taxes. The net estate passing to the children is $1,225,000.00.
If, however, Harry and Wendy set up disclaimer Wills and Harry dies initially, Wendy can elect to “disclaim” her interest in some or all of the $1.5 million estate. If she disclaims $500,000.00, the disclaimed amount of $500,000.00 would immediately be placed in trust for Wendy’s advantage. 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 offers the making it through partner the versatility to develop a comfortable financial circumstance and allow for a significant tax savings. Married couples who think that the Disclaimer Will can benefit them need to look for the assistance of an experienced estate planning lawyer.