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June 2004 Disclaimer Will: Achieving Flexibility in Your Estate Planning For some, the "disclaimer will" can eliminate the need for a trust to protect assets from estate taxation For many of us, our will or living trust was drafted at a time when the estate tax was a virtual certainty; after all, for years the estate tax had a mere $600,000 exclusion. In that era, the typical strategy for a married couple was to create a trust to, first, absorb the portion of the assets of the first to die that fit within the estate exclusion and, second, pass the excess to the surviving spouse. Now fast forward to 2004, when the applicable exclusion amount has soared to $1.5 million per person. That amount is scheduled to rise to $2 million in 2006, with further increases or, depending on which way the political winds blow, possible repeal up for consideration in Congress. To illustrate the impact of the higher exclusion, assume that a couple has a net worth of about $2 million and that the husband dies in 2006. If husband’s will was created while the old exclusion limit was in effect, the personal representative of his estate might be required to place all of the decedent’s assets into a trust, leaving nothing for direct transfer to the surviving wife. By 2006, that trust will be unnecessary, since wife could receive all of the couple’s combined $2 million of net worth, and her exclusion alone, in 2006 and thereafter, would be sufficient to assure no estate tax. In short, many millionaire couples no longer need a trust. And people whose net worth still exceeds the higher limits will want to make their estate plans more flexible. So how do you create an effective estate plan – a will, a trust or both – against the backdrop of periodic changes in the estate tax exclusion and with the possibility of total estate tax repeal? Disclaimer solution An increasingly popular and flexible response to this dilemma is the “disclaimer will.” Unlike traditional documents, the disclaimer language starts by transferring to the surviving spouse 100% of the assets of the first spouse to die. The surviving spouse then has nine months to “disclaim” any portion of that inheritance. To the extent of the disclaimer, the assets typically revert to a credit shelter or other type of trust, where they are protected from estate tax by the decedent’s exclusion. The flexibility of the disclaimer will gives the surviving spouse, working with tax and legal advisors, the advantage of hindsight. After the first death, the assets are valued and compared to the estate exclusion, and the survivor accepts all net worth that can be reasonably sheltered by the one remaining exclusion. Any excess is then pushed back or disclaimed into the trust, up to the amount of the decedent’s estate exclusion. In this way, an unnecessary trust can be avoided; it becomes the vehicle of last resort, used only when necessary. Outdated provisions. For many of us, there may be other out-of-date provisions in our wills or trusts that warrant our attention. What about the designated personal representative? A child who caused you concern when you drafted your will 15 years ago may now be the consummate business professional and the ideal person to manage an estate administration. And are the charities that you long ago identified for a specific bequest still your favored donees? A review of your will or living trust will allow you to catch such changes. Not for everyone The disclaimer can be the most flexible choice for many, but it is not for everyone. If your net worth exceeds the scheduled increases in the estate exclusion, you may prefer to stay with more traditional estate planning strategies. The same may be true if you do not have sufficient confidence in the surviving spouse’s ability to make a good decision on accepting versus disclaiming assets to a trust. The trust provides lifetime income to the survivor, and, if circumstances dictate, principal can also be distributed. But after a disclaimer occurs, the survivor no longer controls the eventual direction of those assets, and some may prefer not to leave this important balancing decision to chance with a post-death disclaimer provision. Time for a review? If it has been more than a few years since your will or living trust was created or last reviewed, the new exclusions and the possible solution offered by disclaimer language are likely to warrant a careful analysis. Please let us know if we can be of assistance in this important area. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |
