Many high net worth families commonly use Credit Shelter Trusts or B Trusts to commit a certain amount of assets, designated by a formula or otherwise, to be placed in a Trust so that the assets are not included in the taxable estate of the surviving spouse. While this is a very effective and often used strategy, it does not necessarily work well for pre-retirement couples.
The problem is that there is a lot of control over the assets that is given up by the surviving spouse. Many clients would rather risk paying some amount in estate taxes rather than giving up control of their assets during their lifetimes.
A Disclaimer Trust Will allows the surviving spouse to make the decision after the death of the first spouse, exactly what assets and in what amount he or she wants to give up control of in order to avoid estate taxes. Very simply, upon the death of the first spouse, everything is left to the surviving spouse, who is allowed an unlimited exclusion from estate taxes. The surviving spouse then has 9 months time in which to disclaim an amount equal to or less than the Federal Estate Tax Exemption ($5.34 Million for 2014).
Whatever is disclaimed goes into a Disclaimer Trust that has the same function as a Credit Shelter Trust. In other words, the surviving spouse retains the right to income for life from the assets, but still has to ask the Trustee for money from the principal for health, education, maintenance and support. The terms can provide, however, for a right to withdraw from principal the greater of $5,000 or 5% on an annual basis.
The important thing to note is that the surviving spouse is able to take a wait and see approach as to what assets, if any, he or she wants to put in trust. They have the opportunity to select assets with large growth potential that will pass tax free to the next generation. In the meantime, all of the assets that the surviving spouse has not disclaimed will remain in his or her complete control for life.
There are several technical aspects to creating these types of trusts and they can even be drafted to provide more flexibility with respect to use of the principal if an independent Trustee is appointed. They are not necessarily for everyone, but can be an attractive alternative for pre- retirement families who would like to have the opportunity to wait and see exactly what the actual circumstances are before committing assets to a trust during the lifetime of the surviving spouse. As always, it is important to consult with an experience estate planning professional before proceeding with any type of trust.