Disclaimer Trusts – A Flexible Option in an Uncertain Estate Planning World

October 17, 2012

At the end of 2012, there is a deadline looming regarding the credit against the federal estate tax that is creating a lot of uncertainty in the area of estate planning. Fortunately, adding a disclaimer trust to your Will can help you handle such uncertainty.

Currently, estates valued below $5.12 million are shielded from federal estate tax by the estate tax credit.  Thus, only estates valued above $5.12 million are subject to the estate tax. However, beginning in 2013, the credit against the estate tax is scheduled to fall to $1 million. It had been anticipated that Congress would have acted by now either to extend the $5.12 million credit or to set the credit at some new amount, but it has not yet done so.

I have counseled clients who are concerned because they don’t know if the estate tax would apply to their estates if they pass away in 2013. These are clients whose estates would be greater than $1 million and less than $5.12 million. If Congress extends the $5.12 million credit, then those clients will be shielded from the tax. On the other hand, if Congress allows the credit to fall to $1 million, then their estates will be subject to the tax. To add to the uncertainty, Congress could change the credit amount to some other number on a future date.

Knowing whether your estate will be subject to the estate tax is very important to your estate plan because, if the tax will apply, there are certain tax provisions that should be in your Will.  Those provisions are designed to help minimize the federal estate tax burden on your estate.  However, the uncertainty regarding the credit makes it difficult to determine which of those tax provisions should be in your Will, or if they should even be in your Will at all.

Fortunately, there is one such provision that can provide for some flexibility: the Disclaimer Trust. While the mechanics of how Disclaimer Trusts work are fairly complicated, they are not reliant on the credit against the estate tax being any specific amount. 

Disclaimer Trusts are extremely helpful in carrying out the estate plan of my clients who don’t know if their estates will be subject to the estate tax. If Congress extends the $5.12 million credit, then the Disclaimer Trusts will be ignored. If Congress allows the credit to drop to $1 million, or if the credit is changed to some other amount, then the trust will allow for the flexible use of the credit to reduce the estate’s exposure to the estate tax.  In other words, it is there if needed.

Depending on the size and make up of your estate, estate planning can be a fairly complex matter. There are other opportunities, such as lifetime gift planning and other credit shelter trusts, that taxpayers can utilize to minimize their estates’ exposure to the estate tax. Consulting with your family, your attorney, and your other professional advisors about estate planning and administration can help you to better understand whether a Disclaimer Trust makes sense for you.

Matthew Grosh is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. He received his law degree from Villanova University and practices in a variety of areas including Estate Planning