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Understanding How Disclaimer Trusts Work


Two trust officials conclude a dealWhen a spouse dies, the surviving spouse typically inherits all of the deceased spouse’s assets. However, this may not be the best approach based on the size of your estate or your tax situation. By using a disclaimer trust, the surviving spouse can disclaim the assets and move them into a trust to avoid taxes on those assets. Working with a financial advisor will help ensure that you’re making wise choices as you create an estate plan.

What Is a Disclaimer Trust?

A disclaimer trust is a type of trust that allows a surviving spouse to avoid paying taxes on assets by disclaiming a portion of their inheritance. These trusts are also known as a “marital disclaimer trust.” The provisions of the marital disclaimer trust are often contained in a will.

When the surviving spouse disclaims the assets, they pass through to a trust as if the trust was the originally intended beneficiary. This technique ensures that these assets are not included in the surviving spouse’s estate when they pass away. Effectively, this doubles the estate tax exemption for a married couple.

While the assets are disclaimed by the surviving spouse, they can benefit the surviving spouse and the children. This strategy allows access to the assets without triggering a taxable event.

How Does a Disclsimer Trust Work?

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To receive the benefits of a disclaimer trust, it needs to be executed properly. When one spouse passes away, the surviving spouse must disclaim assets that are passed through to another trust. This prevents that surviving spouse from paying taxes on the assets and excludes the assets from their future estate. Under certain provisions of the disclaimer trust and the associated will, the surviving spouse and children can benefit from those assets.

When the surviving spouse passes away, the disclaimed assets are not included in the surviving spouse’s estate. Any growth in the disclaimed assets is also excluded. This allows assets from both spouses to receive their own individual estate tax exemption as they pass through to their beneficiaries.

Requirements for a Marital Disclaimer Trust

To receive the full benefits from a marital disclaimer trust, there are certain rules that must be followed:

  • The surviving spouse must not accept (aka disclaim) assets from the deceased spouse.
  • The surviving spouse may not provide direction on who is to receive the assets after they have disclaimed them.
  • An election to disclaim assets must be made within nine months of the date the deceased spouse passed away.
  • The deceased spouse’s will must provide instructions for the surviving spouse to benefit from the disclaimed assets. Otherwise, the assets pass directly to the next named beneficiaries.

If these rules are not followed, it is possible that the assets will be counted in the surviving spouse’s estate. For estates that are close to the estate tax exemption limits, this could lead to an unexpected estate tax bill upon your death.

The Bottom Line

Two mountain climbersProper estate planning is designed to financially provide for your surviving beneficiaries while also reducing or eliminating estate taxes. A disclaimer trust helps married couples to maximize their estate tax exemption limits. It also can provide financially for the surviving spouse and children. In order to fully benefit from this trust strategy, you must follow the rules and act within the mandated timeframe. Trust strategies can be complex and simple mistakes can lead to unexpected tax bills. It is best to work with a professional advisor who can guide you through this process and provide professional expertise on these strategies.

Tips for Estate Planning

  • When managed effectively, your investment accounts can continue to grow and create generational wealth. Our investment calculator can forecast the growth of your investments over time. Variables include your starting balance, additional contributions, rates of return, and timeframe.
  • Having an estate plan for the disposition of your assets can reduce or eliminate estate taxes. Additionally, you can use your will and trust to control assets “from the grave.” Consider working with a financial advisor as you create or modify an estate plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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