The New York Times ran an article
'No Thanks' to a Bequest". In the article, Deborah L. Jacobs
explores how a disclaimer provision either included in an estate plan, or
created after death, can achieve some estate tax savings in this environment of
about the federal estate tax this year or next.
In an estate plan a
"Disclaimer" is when a beneficiary says "No, I don't want that
part of my inheritance." Now, why would a person not want
an inheritance? Well, for a spouse, a disclaimer is used more
accurately to say "I don't want to take my inheritance outright,
and therefore it should pass to a trust where I am a beneficiary."
This trust could capture the exemption amount from federal estate taxes if and
when the federal estate tax comes back. A disclaimer creates
flexibility in a period of uncertainty as the spouse doesn't have to decide now
if it makes sense to fund the trust, they can wait and see what the
tax laws are at the time the first spouse dies.
outlines how a disclaimer works, the benefits of disclaimers (flexibility
being key) and some of the drawbacks (what if the spouse doesn't disclaim, or
accepts the assets so they can't disclaim). However, I think the
article misses one key point about how using disclaimers to create trust can create
inflexibility. If a person sets up a trust in their Will and directs
that it be funded (i.e.: put $1 million is this trust) instead of allowing
it to be funded through a disclaimer (i.e.: I spouse disclaim $1 million which
will now pass to a trust), then the trust can give a person a "Power of
Appointment" over the trust.
A "Power of Appointment"
essentially allows a person to change who gets the trust funds and how after
the death of the decedent. This is incredibly powerful in using a trust. A trust
will last for years or decades after your death. Unless you have a
crystal ball, you don't know what will happen to your beneficiaries, or what
the tax laws will be in the future. By setting up a trust for your spouse
and children, and giving your spouse a Power of Appointment, your spouse has
the ability to change how your children eventually get your assets after your
spouses' death. For example, if a child has a health issue, your spouse
can change the trust to leave more to that child, or to leave it to the child
in trust instead of outright. Without the Power of Appointment the child
might get money that would negate other benefits he was receiving.
So how to balance the flexibility of
a disclaimer with the flexibility of a Power of Appointment? In New Jersey, where we have a state level
estate tax of $675,000, we recommend a "3-Part Will".
R. Wheatley-Liss is a shareholder of the Law Firm of Fein, Such, Kahn &
Shepard, P.C., with offices in Parsippany and Toms River, New Jersey. She
concentrates her practice in the areas of Elder Law, Estate Planning and
Administration, Business Planning and Tax Law. Read more from Deirdre on New Jersey Estate Planning
& Elder Law Blog.