A "Disclaimer Trust" is an estate planning technique where a married couple incorporates an Irrevocable Trust into their Wills or Revocable Living Trust funded only funded if the surviving spouse chooses to disclaim an asset. A Disclaimer Trust is voluntarily funded, so the surviving spouse is given maximum flexibility.
WHAT IS A DISCLAIMER? Inheritances are gifts. No person “must” take a gift. A beneficiary must “claim” their inheritance. If a beneficiary does not want an inheritance, that beneficiary can “disclaim” the inheritance. A “disclaimer” is when the beneficiary formally decides to not take the inheritance.
Example 1: Father’s life insurance names Son primary beneficiary and Grandson as contingent beneficiary. At Father’s death, Son files a disclaimer with the life insurance company disclaiming the right to receive the death benefit. The life insurance proceeds pass to Grandson.
Example 2: Spouse A’s Will says the family vacation home on the Hood Canal passes to Spouse B if Spouse B survives Spouse A but, if Spouse B does not, to Spouse A's daughter from a prior marriage. At Spouse A’s death, Spouse B files a formal disclaimer, disclaiming the Hood Canal property. The vacation home passes to Daughter.
WHAT IS A DISCLAIMER TRUST? A Disclaimer Trust is part of a plan where a married couple uses this arrangement to provide the survivor the option to “claim” the inheritance or “disclaim” the inheritance into a protective Trust. The Will or Revocable Living Trust can direct where disclaimed assets pass. When estate planning with a Disclaimer Trust, the Will or Revocable Living Trust states that disclaimed assets pour into the protective “Disclaimer Trust” for the surviving spouse.
Example: Spouse A’s Will gives all assets outright to Spouse B but, if Spouse B disclaims any asset the Will’s terms transfer the property into a protective Trust for Spouse B. Spouse B disclaims the funds in Spouse A’s bank account, which then pour into the Disclaimer Trust. The Trustee opens an account in the Trust’s name and invests the money. The Trustee has broad powers to use this money for Spouse B's benefit.
WHAT IS THE PURPOSE OF A DISCLAIMER TRUST? A Disclaimer Trust is a flexible tool, often perfect for when the spouses wish to leave each other all assets should one die. The Wills are drafted to state that all assets pass to the surviving spouse but, if the survivor disclaims, the disclaimed asset pours into a protective Trust for the survivor. This way the survivor can benefit from the assets, but have them be sheltered from future creditors, bad marriages, and preserve estate tax exclusions.
For example, Spouse A’s Will says all assets pass to Spouse B. But, if Spouse B disclaims any asset, it pours into a Disclaimer Trust for Spouse B. Spouse A dies. Spouse B has plenty of time to review the assets, consult with their advisors, and then determine what is best for their circumstances at the time. Spouse B might decide to take all the assets. But they may also disclaim some or all of these assets. The choice is completely up to the surviving spouse.
What Spouse B disclaims pours into a Trust for their benefit. As Spouse B has never owned these assets, they are now sheltered from their future creditors and their future spouse, all while still preserving Spouse A's application exclusion amount for estate tax purposes. At Spouse B's death, the Trust can require the remaining assets to go to Spouse A’s children.
If you have any questions about Disclaimer Trusts or any other estate planning topics, please contact us to schedule a consultation. For more than 26 years, we have focused estate planning. We’ve seen it all, and this experience allows us to explain complex estate law and planning techniques clearly and concisely. We make it easy for you to understand Disclaimer Trusts and estate planning so you can make the best decisions for yourself and your family. Give us a call at 253.858.5434 today.