DISCLAIMER WILLS FOR MARRIED COUPLES — ESTATE TAX PLANNING IF YOU NEED IT

If you are a married and need a simple will that minimizes or eliminates estate taxes, consider using a “disclaimer will.” It provides “wait and see” flexibility on whether to use tax planning trusts when the first spouse dies. In other words, you can make choices at that time based on your wealth and the status of tax laws. You don’t have to complicate your life with trusts if they serve no purpose.

Most people will pay no federal estate tax, even without tax planning. The lifetime exemption is $5.124M per spouse. Further, the unused exemption of the first spouse to die is “portable,” meaning that it automatically shifts to the surviving spouse, thereby leaving the survivor with a $10.248M exemption. It is true the laws may change, but even under Obama’s 2013 budget the exemption only rolls back to $3.5M, with full portability.

In years past, when the exemption was, say, only $1M, most wills automatically caused the first $1M of the decedent’s wealth to pass to a “credit shelter” or “bypass” trust, rather than outright to the surviving spouse. This amount was not included in the survivor’s estate (at her death), which had the effect of reducing estate taxes at that time. Since the exemption was not “portable,” the credit shelter trust was necessary to capture the benefit of the decedent’s exemption. Absent a trust, the decedent’s $1M exemption would be lost. Portability changes the landscape, and a credit shelter trust is no longer necessary to utilize the first spouse’s federal estate tax exemption. And a will calling for a mandatory credit shelter trust may force the surviving spouse to hold wealth in a trust even it serves no tax purpose.

A more flexible approach is to pass all of the wealth outright to the surviving spouse, except to the extent she disclaims. The disclaimed assets pass to a “disclaimer trust,” which is similar to a traditional credit shelter trust. Conceptually, the surviving spouse deflects assets as needed to reduce her estate below the taxable threshold. So long as (i) the estate tax exemption remains portable, or (ii) the survivor’s wealth is likely to be less than her separate exemption, there will probably be no reason to disclaim. Thus, a disclaimer will provides for a tax planning trust – but only if needed.

One final nuance. Unlike the federal system, the Oregon and Washington estate tax exemptions (of $1M and $2M, respectively) are not portable. Thus, the surviving spouse’s exemption will be only $1M or $2M, not $2M or $4M. To minimize Oregon or Washington estate taxes, the surviving spouse may wish to disclaim up to $1M or $2M, as the case may be, if her estate would otherwise exceed the applicable threshold. Some spouses intentionally forego this opportunity. For example, an Oregon surviving spouse in her 50s may conclude that the hassle of administering a disclaimer trust for the next 30 or 40 years outweighs the potential tax benefit. (Administration includes separate accounting for all trust receipts and disbursements, and separate trust income tax returns each year.) Since the Oregon marginal rate starts at 10%, a disclaimer trust funded with $1M may only produce $100,000 of tax savings at the surviving spouse’s death.

In conclusion, most married clients are well served by using a disclaimer trust to provide “wait and see” flexibility to decide whether to use tax planning trusts when the first spouse dies.

6 thoughts on “DISCLAIMER WILLS FOR MARRIED COUPLES — ESTATE TAX PLANNING IF YOU NEED IT

  1. my mother passed 4 months ago and left a undisclosed trust with the estate attorney the trustee..when do we find out what is in the trust..a rental house is the only part of moms estate not mentioned in her will so i assume its in the trust..are we as members of her estate to know what is in this trust..when is the trust to be revealed..nobody knows why it was setup…is there a way to force it to be revealed??

    mom gifted everything else that was not in dads trust when he passed 5 years ago..all that is left is a small amount of cash and this trust in the lawyers name..i looked up the deed the lawyer owns it as trustee…what would be the reason for setting up a trust like this..my sister was trustee for everything else.

    • Sidney,

      Under Oregon law, within a “reasonable time” after your mother’s death, the trustee is required to notify you of your right to request a copy of the trust. ORS 130.710(2)(c). “Reasonable time” should not exceed 30 days. Is the attorney trustee refusing to provide you a copy of the trust?

      Dave

  2. David,
    My mom passed away in October 2013 in Oregon; a family trust was in place with a disclaimer trust option. Total estate value is $2.5M. My dad does not want to create the disclaimer trust, but would prefer to simply gift $1.5M to my brother and me to get his estate under $1M for Oregon estate tax purpose (my understanding is unlimited tax-free gifting in Oregon and he would only need to file a IRS 709 form) — does this seem reasonable? The only advantage I can see for creating the disclaimer is the stepped-up basis, but he only has a $20K LT cap gain on his investments.
    Thank you,
    Maurie

    • Maurie,

      Your dad’s preference works fine, and your analysis is correct. Many clients have very few “high basis” assets, such as cash, and are relegated to funding gifts with appreciated property. The eventual capital gains tax to the donees, when they sell, may dwarf the Oregon estate tax savings. But not in your case, assuming that the $1.5M gift has only $20k of appreciation.

      Dave

      • Thank you, Dave. Quick follow-up question: the $20K LT cap gain on investments — is that eligible to receive a step-up in basis at my mom’s death, since it applies to assets that were actually included in the family trust at the time of death?

        • Maurie,

          If your parents live in a separate property state, your mom’s half of the trust took on a stepped up basis. If your parents live in a community property state, both halves took on a stepped up basis.

          Dave

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