With the estate tax exemption expected to drop significantly in 2026, many clients are interested in estate planning to minimize those taxes. One of the tools an estate planning attorney might suggest to help avoid and minimize those taxes is the disclaimer trust.
What is a disclaimer trust?
A disclaimer trust is a type of trust used primarily to provide flexibility around tax planning. The disclaimer trust is used by married couples. It’s key feature is that is gives the surviving spouse the option to “disclaim” some of the trust assets on the trust on the death of the first spouse. Assets disclaimed into the irrevocable decedent’s trust are able to be used by the surviving spouse during their lifetime, but are not included in the taxable estate.
How does it work?
During both spouse’s lifetime, the disclaimer trust is a joint revocable trust. Upon the death of the first spouse, the surviving spouse has the option of disclaiming some of the assets. These assets go into the “decedent’s trust.” The decedent’s trust is irrevocable and removes assets from the taxable estate. The rest of the estate remains in the “survivor’s trust.” Usually the surviving spouse is able to use funds in both the survivor’s trust and the decedent’s trust. The survivor can only amend the terms of the survivor’s trust though, in case they, wanted to change the beneficiaries.
If the surviving spouse chooses not to disclaim, then all of the assets remain in the revocable trust. These assets can all be used by the surviving spouse during their lifetime. If no assets are disclaimed, the survivor will still be able to amend the trust and change the dispositive provisions.
Want to see this in a more visually appealing way? Check out this Disclaimer Trust Diagram.
Why would you disclaim?
The decision to disclaim is at it’s core a tax planning decision. If the gross value of the combined estate is considerably less than the estate tax exemption there may not be a need to disclaim. Although, you may want to also consider the realistic likelihood of significant changes in the taxable estate. The estate tax exemption amount could also change and should be considered. If the gross value of the combined estate is close to or exceeds the federal estate tax exemption, then, to avoid surpassing the estate tax exemption, assets likely ought to be disclaimed. Of course, it is hardly ever truly that simple.
When making the decision to disclaim assets, the surviving spouse will need to consider many things. This includes the value of the estate, the estate tax exemption amount, the likelihood that there will be significant changes in the value of the estate and any upcoming changes in tax law. Timelines are also important to consider. There are important deadlines at nine months, fifteen months, and five years after the date of death for the first spouse. Before making any decisions, the surviving spouse will need to consult with their tax advisor and legal counsel.
Is the disclaimer trust right for you?
There are many considerations to take into account for estate planning. Generally, the disclaimer trust can be a good fit for couples who may be close to the estate tax exemption. But, there are considerations other than tax consequences to consider when creating a disclaimer trust. You might also consider:
- Will the surviving spouse have the capacity/ know how to disclaim assets appropriately?
- Are both trustors comfortable giving the survivor of them the ability to amend the trust and dispositive provisions after death?
- Are estate tax exemption amounts likely to change in the near future? Right now, the answer to this one is yes.
You should consult with an estate planning attorney to find out if a disclaimer trust is a good fit for your estate plan.
