The use of the disclaimer trust, incorporated into a will, may be a viable alternative and useful in estate planning situations when the combined assets of the spouses are less than $650,000 (exemption equivalent to $650,000 for increasing to $1,000,000 in 2006). The use if a disclaimer trust is especially applicable when there is a reasonable likelihood that the assets will exceed the exemption equivalent by the time of the second spouses death and thereby creating an estate.
When a couple's underlying desire is for the surviving spouse to receive the entire estate outright and tax saving is the only reason for the their use of a trust, more flexibility can be added to the "A-B" trust plan. Each spouse can arrange his or her estate to go outright to the surviving spouse, but specify that to the extent the surviving spouse disclaims the estate of the first spouse dies, the disclaimed portion will go to the "A-B" trust plan. Later, when the first spouse dies, the surviving spouse can decide, with better awareness of the conditions the relevant, whether to take outright ownership of the estate or to allow the estate to go into the "A-B" trust in order to achieve tax savings on such surviving spouse death. A disclaimer can also be taken and the amount of the estate to be placed in the bypass trust.
When the "B" trust qualifies as a bypass trust, the assets in that trust will not be taxed on the surviving spouses death; they will pass free of death tax to the children or the other remainder beneficiaries.
A disclaimer is the refusal to accept benefits conferred by will or by operation of law. If a beneficiary does not want his or her share of an estate because of adverse tax consequences he or she should consider disclaiming such interest.
Under I.R.C. §2518 a disclaimer is not deemed a transfer (which could cause adverse tax consequences) by the disclaiming party if there is an irrevocable an unqualified refusal to accept an interest in property satisfies four (4) conditions.
- Refusal must be in writing:
- Must be made within nine(9) months of the time that the interest is irrevocably transferred (in the event of inheritance would be nine(9) months from the date of decedents death).
- Disclaiming party must not have accepted the interest or any of it's benefits before making the disclaimer.
- The interest must pass to a person other than the disclaiming party without any direction on the part of disclaiming party. There is an exception for spouses. When the disclaiming person is the surviving spouse of the decedent, such spouse may disclaim an interest in property, even if, as a result, the property passes to a trust in which the spouse has an interest, I.R.C. §2518(b)(4). However, the spouse may not disclaim an interest which passes into a trust when the spouse has a limited power to direct to whom the interest will go. If the spouse has limited power to appoint the trust assets to third parties and the power is not limited to an ascertainable standard ( e.g. health, education, maintenance and support), the spouse will be deemed to have the power of direction and the disclaimer will not be a qualified one. Reg. §25-25-18-2(e)(2)Ex. 5
See Planning an Estate, 4th Ed. (Weinstock)