Legal Definitions - disclaimer trust

A disclaimer trust is a specialized legal arrangement often included in a will, designed to provide flexibility and potential tax benefits for married couples in their estate planning. It allows a surviving spouse to decide, after their partner's death, whether to directly inherit certain assets or to "disclaim" them.

If the surviving spouse chooses to disclaim these assets, they are then automatically directed into an irrevocable trust, which was previously established within the deceased spouse's will. The primary benefit of this strategy is to help reduce or avoid estate taxes that might otherwise apply to the surviving spouse's estate. While the surviving spouse does not own the assets outright within the trust, they can still benefit from them according to the specific terms set out in the trust document.

Beyond tax savings, a disclaimer trust offers additional protections. It can shield assets from the surviving spouse's creditors, prevent them from being claimed by a future spouse if the survivor remarries, and ensure that specific assets ultimately pass to designated beneficiaries, such as children, after the surviving spouse's death.

Here are a few examples of how a disclaimer trust might be used:

• Estate Tax Planning: Imagine Robert and Susan, a wealthy couple with substantial assets. When Robert passes away, his will leaves his entire estate to Susan. However, Susan realizes that inheriting all of Robert's assets directly would significantly increase her own taxable estate, potentially leading to a large estate tax liability when she eventually dies. To mitigate this, Susan decides to disclaim a portion of Robert's investment portfolio. According to Robert's will, these disclaimed investments are then placed into a disclaimer trust. Susan can still receive income from this portfolio during her lifetime, but the principal assets are held within the trust, effectively bypassing her taxable estate and ensuring they will pass to their children more tax-efficiently after her death.

  This example illustrates how a surviving spouse can use a disclaimer to prevent assets from being added to their own taxable estate, while still benefiting from them, ultimately reducing future estate tax burdens for their heirs.

• Asset Protection and Future Beneficiaries: Consider Mark and Lisa, who have been married for many years and have two adult children. Lisa has some personal financial vulnerabilities, including a history of business ventures that incurred debt. When Mark passes away, his will includes a provision for a disclaimer trust. Lisa, after consulting with her financial advisor, decides to disclaim a significant portion of Mark's inheritance, including a valuable piece of real estate. These disclaimed assets are then placed into the disclaimer trust. This action protects those assets from her existing creditors, as they are no longer considered her personal property. Furthermore, if Lisa were to remarry in the future, the assets in the disclaimer trust would be protected from any claims by a new spouse and would ultimately pass to her and Mark's children as intended.

  This scenario demonstrates how a disclaimer trust can protect assets from a surviving spouse's creditors and ensure that the assets are preserved for the couple's children, even if the surviving spouse remarries.

• Ensuring Specific Inheritances: Sarah and Tom have three grandchildren whom they adore and wish to provide for specifically. Tom's will specifies that if Sarah survives him, she can choose to disclaim certain assets, such as a specific sum of money and a family heirloom collection. If she disclaims them, these assets would fund a disclaimer trust for her benefit during her lifetime, with the remainder going directly to their grandchildren upon her passing. When Tom dies, Sarah, who is financially secure from her own assets, decides to disclaim the specified money and heirloom collection. These items are then placed into the disclaimer trust. Sarah can enjoy the income from the money and the use of the heirlooms during her life, but she cannot sell them or spend the principal in a way that would prevent them from eventually passing to their grandchildren. This guarantees the grandchildren's inheritance of these particular assets.

  This example highlights how a disclaimer trust can be used to ensure that specific assets are ultimately inherited by designated beneficiaries, while still allowing the surviving spouse to benefit from them during their lifetime.