20 ADVISOR TODAY | February 2010

practice specialties | By Julius H. Giarmarco, J.D., LL.M.

ESTATE PLANNING

Disclaimer TrustsThese plans are for couples whose combined estate may or may not exceed the federal estate-tax exemption.

Assuming the federal estate-tax exemption remains at its current level of $3.5 million or more,

then, for most people, the FET has been repealed. According to the Tax Policy Center, only fi ve of every 100,000 people have estates over $3.5 million.

For married couples with taxable estates, the common planning tool is for each spouse to establish a revocable living trust. Upon the death of the fi rst spouse, an amount equal to his or her FET exemption is allocated to a credit shelter trust. The deceased spouse’s estate, over and above the amount allocated to the CST, will pass estate-tax-free to the marital trust because of the unlimited marital deduction. When the surviving spouse dies, the assets in the marital trust, along with the assets in the surviving spouse’s living trust, will be subject to estate taxes, after subtracting the surviving spouse’s FET exemption. But the assets in the CST will pass estate-tax-free to the rest of the benefi ciaries.

A CST has the following advantages:It uses both spouses’ FET exemp-tions, while allowing the surviving spouse access to, and control over, the assets in the CST.It preserves assets for the couple’s descendants, in case the surviving spouse remarries.It protects the surviving spouse and descendants from creditors.

But a CST does have some disadvan-tages. The surviving spouse’s access to the assets in the CST, albeit broad, is re-stricted. Moreover, if the surviving spouse withdraws more from the CST than permitted, he or she may be accountable to the ultimate benefi ciaries of the CST, i.e., the children and grandchildren.

The CST also adds complexity to the surviving spouse’s life in that separate records for the CST must be maintained, and annual income tax returns (Form 1041), must be fi led for the remainder of the surviving spouse’s lifetime. And if a co-trustee over the CST is used, the surviving spouse will have to cooperate with that trustee.

Many couples with nontaxable es-tates, particularly those with children all from the same marriage, would prefer to simply leave their estate to the surviving spouse. But if their es-tates were to increase and/or the FET exemption was reduced by future legislation, they still want the ability to use both spouses’ FET exemptions. It is possible to accomplish both objec-tives with a disclaimer trust.

How a disclaimer trust worksWith a DT, a married couple’s revocable living trusts leave the deceased spouse’s entire estate to the surviving spouse. The CST is then funded only if the sur-viving spouse disclaims (refuses) part of the deceased spouse’s estate.

This enables the surviving spouse to decide how much to keep outright (to be taxed at the second death) and the amount to be allocated to the CST, where it is shielded from estate tax at the second death.

In making an informed decision to disclaim and how much to disclaim, one must examine the size of the combined estate, the surviving spouse’s age and health (which impacts the spouse’s needs for funds), whether minor children will be benefi ciaries of the CST, the potential appreciation of the assets not disclaimed and the status of the FET exemption.

To be a “qualifi ed” disclaimer for FET purposes, the disclaimer must meet certain requirements set forth in Internal Revenue Code Section 2518(b), including:

The disclaimer must be received by the trustee within nine months of the grantor-spouse’s death.The surviving spouse must not have accepted the disclaimed prop-erty or any of its benefi ts.As a result of the disclaimer, the interest must pass without any di-rection from the surviving spouse.

There are also state law require-ments for making a disclaimer. Failure by the surviving spouse to satisfy all of the federal requirements mentioned in this article will result in the disclaimer being treated as a taxable gift from the surviving spouse to the remain-der benefi ciaries of the CST, i.e., the children and grandchildren.

Julius H. Giarmarco, J.D., LL.M., is the chair of the Trusts and Estates Practice Group at Giarmarco, Mullins & Horton, P.C. in Troy, Mich. Visit his website at www.disinherit-irs.com for resource materials on estate and business-succession planning. Contact him at jhg@disinherit-irs.com.