How to Use Trust Disclaimers in Estate Planning

When considering drafting a will or trust document, testators and settlors typically seek out the professional advice of an attorney. This stems from the fact that lawyers are the only persons legally allowed to perform many of the tasks required to create a will or trust. But, CPAs and financial planners may be of some help to an attorney in helping to reduce the tax liability for an estate. Even with a crack team of specialists working on an estate plan, tax mitigation can be difficult given the nebulous nature of federal and state estate and gift tax laws.

These changes require consistent updates to wills and trust documents in order to make sure the settlor/testator’s estate passes without additional tax liability. If these changes are not made, beneficiaries may be subject to much larger tax repercussions than intended. This can create issues if the assets passed to an heir are highly illiquid and significant taxes are owed. Devised property with high value but no ready market for sale may force beneficiaries to sell at extreme discounts simply to cover the tax costs.

A possible solution for this type of scenario is a disclaimer trust. A disclaimer trust is a type of trust that contains provisions that allow a surviving spouse to transfer certain assets to the trust by disclaiming ownership of the assets. After disclaimer, these assets are placed in the trust tax-free. The assets may then be used to support named beneficiaries, like the children of the decedent. It must be made clear though, once an asset or property is disclaimed, there is no going back.

Disclaimer trusts may have some benefit for specific clients, but also have some risk inherent to their use. Estate planners must educate and inform clients to ensure that they are aware of the possible pitfalls.

See anthonym, How to Use Trust Disclaimers in Estate Planning, accountingweb, August 9, 2017.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.