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How To Save On Estate Taxes By Adding A Disclaimer Trust Clause To Your Will

How to Save on Estate Taxes by Adding a Disclaimer Trust Clause to Your Will

With the 2013 increase of the Federal Estate and Gift tax exemption to $5.25 million, more decedent’s estates are escaping the federal estate tax. However, your estate may still be subject to state estate taxes due to significantly lower exemption amounts.

Adding a disclaimer clause to your will may provide it with additional flexibility at your death and potentially produce favorable estate tax savings for your heirs. A disclaimer is an irrevocable refusal by a potential beneficiary to accept a gift or bequest from the estate of a decedent. You can disclaim a particular asset or an amount of money. When used, the disclaimer passes property to the next person eligible to receive it; it cannot be disclaimed to someone identified by the beneficiary.

Incorporating a disclaimer also adds flexibility to your estate plan because it allows your surviving spouse to reevaluate their financial status at the time of your death and determine which assets they would like to receive. By utilizing a disclaimer, the property is no longer included in the disclaimer’s gross estate, and can avoid any negative estate tax consequences.

There are a few ways in which a disclaimer can provide tax savings. The first is through the avoidance of any gift tax. For example, if you disclaim an asset, that asset can effectively pass to another heir without realizing any gift tax on the transfer.

A second tax savings from a disclaimer is the exclusion of the disclaimed asset from your survivor spouse’s gross estate. For instance, if a surviving spouse disclaims assets worth $1 million dollars and her remaining estate is less than the federal exemption ($5.25 million), but above their state’s exemption then those assets would be subject to state estate tax. If the assets’ value is $1 million, and the state’s estate tax is 10%, a common amount, the surviving spouse could save $100,000 of taxes at their death.

Finally, disclaiming assets in to a Credit Shelter Trust can be a very tax efficient strategy. Assets placed in a disclaimer trust can avoid both federal and state estate tax and pass successfully to named beneficiaries. Additionally, the assets are not only removed from your surviving spouse’s gross estate but can also remove any appreciation. For example, if a bypass trust is originally funded with assets worth $1 million dollars at your death and appreciates in value to $2 million dollars at the time of your surviving spouse’s death, then the additional $1 million dollars of appreciation is also passed to the disclaimer trust beneficiaries free of estate taxes. If your state estate tax is 10%, this could provide $200,000 of tax savings.

Another benefit of using a Credit Shelter Trust is that your surviving spouse retains the right to receive income from the trust during her lifetime, and can also access funds from it for health, education, maintenance and support reasons.

Please remember that in order for the disclaimer to be effective, all of the following must occur:

  1. The disclaimer must be an irrevocable refusal to accept the property.
  2. The disclaiming party cannot accept any interest or benefit in the property prior to disclaiming.
  3. The refusal must be in writing.
  4. The party must disclaim the property within nine months of the decedents date of death
  5. The disclaiming party cannot determine who receives a future interest in the property.

One should still consult their attorney before disclaiming assets even if they believe they’ve satisfied all of the criteria mentioned above.

While a surviving spouse can always choose

not to disclaim property at the death of their spouse, it’s an easy provision to include in your will—just in case.

As always, you should enlist the help of your attorney, along with your Wealth Advisor, before updating any estate planning documents.

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Please remember that RegentAtlantic does not provide legal or tax advice. Please remember to consult with a legal and tax professional of your choosing prior to implementing any of the strategies discussed in this article.

This information is based on our understanding of the current tax law. Please note that Congress may change these laws at any time.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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