Disclaimer Trusts

Another way of dealing with the tax uncertainty is to bequest everything to the surviving spouse with a disclaimer provision.  Each spouse leaves in a Will or in a Revocable Trust the entire estate outright to the survivor spouse.  The Credit Shelter Trust is to be funded by the surviving spouse disclaiming, or rejectingpart of the estate.  This enables the survivor to decide how much to keep outright (and to be taxed in the second estate), and the amount to continue in trust shielded from any further estate tax.  

Except for 2010 where the surviving spouse has until December 17, 2011 to make the disclaimer provided that the state law allows such a late disclaimer, there is a 9-month period after the first death in which the survivor may disclaim or reject all or part of his or her inheritance.  

Most assets can be disclaimed, including life insurance, but there are strict rules.  The survivor cannot accept, collect or exert control over an asset and then disclaim it – further, joint accounts with the right of survivorship between spouses and some other types of joint property may create special problems The Internal Revenue Service will recognize a disclaimer of property that passes by operation of law, such as joint accounts with the right of survivorship, however many state property laws do not.  

While this type of "Disclaimer Trust" provides discretion, if the survivor fails to disclaim there will be no estate tax savings There may be a great reluctance on the part of the spouse to "give up" anything such a short time after an emotional loss.  

 In order to take advantage of the estate tax planning provisions of the credit shelter trusts, ensure maximum utilization of estate exemptions, and avoid the problems of disclaiming joint property discussed above, it is recommend that the spouses split their assets, so that each spouse will have property worth approximately one half the total in the spouse’s name alone so it can pass pursuant to their Wills into a credit shelter trust.