02 Nov Let Your Spouse Decide Later
Most estate plans are built on assumptions. How large the estate will be. What the tax law will look like. Whether the surviving spouse will need the money or can afford to set some aside. The challenge is that these assumptions are made years, sometimes decades, before they matter.
But what if you could give your surviving spouse the flexibility to respond to these changes years (or even decades) later? A disclaimer provision gives you and your spouse this power. It’s a provision in the trust that says the surviving spouse gets everything, unless they choose to redirect some of it into a separate trust. That separate trust, usually called a credit shelter trust or bypass trust, sits outside the surviving spouse’s estate. It can grow without adding to their estate tax exposure, it’s protected from their creditors, and it stays on the track the couple originally chose.
The key word is “choose.” In a disclaimer trust structure, at the death of the first spouse, the trust splits. The decision is then in the surviving spouse’s hands at the moment when they actually have the information to make it.
Why the Timing Matters
Tax law changes. Exemptions rise and fall. A trust signed in 2015 was drafted under a $5.43 million exemption. Today it’s over $13 million. If the exemption drops back, the math changes again.
A disclaimer provision accounts for this. If the exemption is high and the estate is well below it, the surviving spouse accepts everything outright and keeps things simple. If the exemption has dropped, or the estate has grown, or state estate tax is a concern, the surviving spouse disclaims a portion into the credit shelter trust and preserves the first spouse’s exemption.
Neither decision has to be made until nine months after the first death. That’s the federal deadline for a qualified disclaimer.
What Gets Disclaimed
A disclaimer doesn’t have to be all or nothing. The surviving spouse can disclaim a specific dollar amount, a percentage, or particular assets. The disclaimed assets flow into the credit shelter trust as if the surviving spouse never owned them.
This is where the trust drafting matters. The disclaimer provision has to be in the trust before the first spouse dies. If it’s not there yet and both spouses are still living, an amendment can add it. It has to specify where disclaimed assets go, who serves as trustee of the credit shelter trust, and how distributions work. You can’t add this after the first spouse dies.
The Nine-Month Window
A qualified disclaimer under federal law has specific requirements. It has to be in writing. It has to be delivered within nine months of the date of death. The surviving spouse can’t have accepted any benefit from the disclaimed assets before signing. And the assets have to pass to the credit shelter trust without the surviving spouse directing where they go.
Miss the deadline, and the option disappears. The assets stay in the surviving spouse’s estate, and the first spouse’s exemption, to the extent it wasn’t used, is either preserved through a portability election or lost.
This is one of the first conversations an estate planning attorney should have with the surviving spouse after a death. Nine months sounds like plenty of time. But it can be a very short time period when there’s grief, probate, and a dozen other decisions competing for attention.
When This Makes Sense
Disclaimer trusts work best for couples whose estates are moving towards the federal (or state) exemption. If the estate is clearly under the exemption and likely to stay there, a simpler plan may be enough. If the estate is clearly over, a mandatory credit shelter trust or an irrevocable trust may be the better tool.
The sweet spot is the family whose estate sits somewhere between $3 million and $15 million, where the right answer depends on what the exemption looks like when the first spouse dies. That’s a wide range, and it covers a lot of families who don’t think of themselves as having an estate tax problem.
A well-drafted disclaimer provision gives the surviving spouse the ability to make the right call with the right information, instead of locking the family into a structure that made sense 10 years ago.
Is your trust flexible enough for what comes next?
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This article is general information, not legal advice for your situation.