Using a Disclaimer to Deal with Estate Tax Uncertainty

In prior posts, I have reported that the lack of a federal estate tax in 2010 could have unintended consequences on will distribution arrangements that are dependent on the existence of a federal estate tax to take effect and carry out the decedent’s intentions, such as a bypass trust. Redrafting wills based on the lack of an estate tax presents it’s own problems, however, because it is likely that the estate tax will return. 

Deborah L. Jacobs, in Saying ‘No Thanks’ to a Bequest, NY Times, Feb. 17, 2010, discusses how a disclaimer could be a solution to the estate tax uncertainty:

Let’s say a will sets up both a marital trust to provide for the spouse and a separate family trust to provide for the spouse and other relatives. Douglas L. Siegler, a lawyer with Sutherland, a Washington-based firm, would have all the assets initially go to the trust for the spouse. That way, if there is an estate tax when someone dies, the spouse could disclaim all or part of the inheritance — up to whatever the tax-free amount happens to be — and have it go to the family trust.

Mr. Rubenstein achieves a similar effect by encouraging clients to leave everything to the spouse outright, rather than in a marital trust. But he, too, would have a family trust ready to receive assets that are disclaimed.

Both approaches postpone the decision about how much goes into the family trust until someone dies. And when it is not clear whether there will be an estate tax, that is an attractive option.

There is substantial risk in using the disclaimer approach, however, because it is possible the surviving spouse in the example above will not comply with the statutory requirements for an effective disclaimer or the spouse will become greedy and choose not to honor their promise to disclaim.

See Deborah L. Jacobs, Saying ‘No Thanks’ to a Bequest, NY Times, Feb. 17, 2010.