To Hedge Against Estate Tax Exclusion Changes, Try Disclaimers

The committee estimates that Congress needs to come up with $6.7 trillion in spending cuts and extra revenue, spread over a 10-year period, to stabilize the federal debt by 2033.

The debt fixer tool shows that letting the estate tax exclusion return to $5 million for an individual and $10 million for a couple could add $120 billion in revenue.

Disclaimer Trusts

A trust is an arrangement that gives one party, or trustee, the ability to hold and manage assets on behalf of one or more beneficiaries.

When a client adds a disclaimer trust to a will, the trust will be funded if and only if the client's spouse "disclaims," or rejects, part or all of the assets left by the client when the client dies. The rejected assets then flow into the disclaimer trust.

The surviving spouse can use the provision to keep enough of an inheritance to pay the bills while tailoring the amount received to reflect the conditions in effect when the client dies.

Lofton is not the only financial professional who has noticed that a disclaimer trust might be useful at a time when federal estate tax rules appear to be subject to change.

Trust & Will and the Fidelity wealth management team also have proposed the use of disclaimer trusts as a response to estate tax exclusion uncertainty.

Caveats

Patrick Hicks, Trust & Will's head of legal, said in that firm's discussion of the topic that using a disclaimer trust could lead to problems for a spouse who might miss a disclaimer execution time deadline or who might have conflicts with the children who could end up with the cash in the disclaimer trust.

In the past, trust law specialists warned that estate planners had to pay close attention to the assets used together with the disclaimer trust. Some suggested that clients could run into problems if the disclaimer trust planning strategy clashes with the beneficiary designations in life insurance policies used together with a disclaimer trust.

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