It's time to dust off our old friend, the disclaimer trust
Tuesday, February 8, 2011
Glenn Karisch in 2010 tax act, bypass trusts, disclaimer trust, estate planning

In moderately sized estates and happy family situations, a disclaimer trust is likely to be the right answer to the tax planning dilemma.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 set the tax-free amount for persons dying in 2011 and 2012 at $5 million. The 2010 act also introduced "portability" -- if the proper procedures are followed, the surviving spouse may use the unused tax-free amount of the first spouse to die.  The 2010 act leaves us hanging, however, since the tax-free amount drops to $1 million and portability goes away in 2013 unless Congress extends the new law.

In this environment, what sort of estate tax planning makes sense for married couples with moderate wealth?

Problems with portability

At first glance, there seems to be no reason for most couples to do bypass trust planning because of portability.  If the surviving spouse gets to use the unused portion of the tax-free amount of the first to die, then why go to the trouble and expense of having a bypass trust?  (For an explanation of basic bypass trust planning, download this paper by Glenn Karisch from

When looking deeper, the problems with portability become apparent:

Problems with formula-funded bypass trusts

Using a bypass trust funded by a formula intended to maximize the property placed in the trust avoids most of the problems caused by portability, but it creates other problems:

Enter the disclaimer trust

A bypass trust funded by disclaimer may fill the bill for many married couples. Here's how disclaimer trusts work:

A special rule that applies only to spouses permits the spouse to disclaim property into a trust of which the spouse is a beneficiary.  Internal Revenue Code Section 2518(b)(4)(A).  Therefore, the spouse may be a beneficiary of the trust.  If the trustee's power to make distributions is limited by an ascertainable standard like "health, education, maintenance and support," then the surviving spouse may be the trustee of the trust.  If the beneficiary designations on life insurance and retirement plans are coordinated properly, the surviving spouse may disclaim some or all of these assets, causing them to go into the bypass trust.

The disclaimer trust permits deferring the decision about whether or not to have a bypass trust until after the death of the first spouse to die.  With the volatility of the law and the economy, this might be the best time to decide whether or not estate tax planning is needed.  Also, a couple may appear to have no estate tax worries now, but increases in wealth may push them into needing a trust.  The disclaimer trust makes an excellent back-up estate tax plan.

Disclaimer trusts have problems, too

Disclaimer trusts have their own set of problems and are only appropriate in certain situations.  Here are some of the problems which may arise:

Keep all of your tools sharpened

In times of changing tax laws and a fluctuating economy, estate planners must be ready to use different techniques.  There are fewer "once size fits all" plans these days.  A disclaimer trust can be an effective tool for many married couples, but in most cases only if they have no children by prior marriages.

Article originally appeared on Texas Probate (
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