A Disclaimer Trust describes an Estate Planning technique where a married couple incorporates an Irrevocable Trust into their Will or Revocable Trust funded only funded if the surviving spouse chooses to disclaim an asset. A Disclaimer Trust is voluntarily funded, so the surviving spouse is given maximum flexibility.
Inheritances are gifts. No person “must” take a gift. A beneficiary must “Claim” his inheritance. If a beneficiary does not want an inheritance, that beneficiary can “disclaim” the inheritance. A “Disclaimer” is when the beneficiary formally decides to not take the inheritance.
Example: Father’s life insurance names Son primary beneficiary and Grandson as contingent beneficiary. At Father’s death, Son files a disclaimer with the life insurance company disclaiming the right to receive the death benefit. The life insurance proceeds pass to Grandson.
Example: Husband’s Will says the family vacation home in Atlantic County, New Jersey passes to Wife if she survives him but, if she does not, to his Son from a prior marriage. At Husband’s death, Wife files a formal disclaimer, disclaiming the Atlantic County property. The vacation home passes to Son.
A Disclaimer Trust is part of a plan where a married couple uses this arrangement to provide the survivor the option to “Claim” the inheritance or “Disclaim” the inheritance into a protective trust. The Will or Revocable Living Trust can direct where disclaimed assets pass. When estate planning with a Disclaimer Trust, the Will or Revocable Trust states that disclaimed assets pour into the protective “Disclaimer Trust” for the surviving spouse.
Example: Husband’s Will gives all assets outright to Wife but, if she disclaims any asset the Will’s terms transfer the property into a protective trust or Wife. Wife disclaims the funds in Husband’s bank account, which then pour into the Disclaimer Trust. The Trustee opens an account in the Trust’s name and invests the money. The Trustee has broad powers to use this money for the Wife.
A Disclaimer Trust is a flexible tool, often perfect for when the spouses wish to leave each other all assets should one die. The Wills are drafted to state that all assets pass to the surviving spouse but, if the survivor disclaims, the disclaimed asset pours into a protective trust for the survivor. This way the survivor can benefit from the assets, but have them be sheltered from future creditors and bad marriages.
For example, Husband’s will says all assets pass to Wife. But, if she disclaims any asset, it pours into a Disclaimer Trust for Wife. Husband dies. Wife has plenty of time to review the assets, consult with her advisers and then determine what is best for her. She might decide to take all the assets. But she may also disclaim some or all of these assets. The choice is completely up to the surviving spouse.
What she disclaims pours into a trust for her benefit; the Disclaimer Trust. As she has never owned these assets, they are now sheltered from her future creditors and her future husband. At her death, the trust can require the remaining assets to go to the Husband’s children.
Here are some questions clients, beneficiaries, and Trustees ask:
Once an asset is disclaimed, the right to “claim” it has past. This is why a well drafted Disclaimer Trust to hold the disclaimed property is vital.
Typically, if a person disclaims an asset, they cannot benefit from that asset in the future. The exception is a spouse. Only a spouse can disclaim assets into a trust where the spouse benefits. In your Will or Revocable Living Trust, you can state that if your spouse disclaims assets they pour into a trust for your children.
Example: Father’s Will states that a house passes to his Wife, but if she disclaims, the house passes into a Disclaimer Trust for Daughter. At Father’s death, Wife files a formal disclaimer, disclaiming the house. The house pours into the Disclaimer Trust for Daughter.
Yes, you can disclaim an entire inheritance or any portion.
Example: Mother’s Will states that son inherits $100,000 and any portion that he disclaims passes to Grandson. Son files a formal disclaimer disclaiming $30,000. Son receives $70,000, and Grandson receives $30,000.
As long as the person disclaiming the asset is not the beneficiary, the Disclaimer Trust can be for any beneficiary. The one exception is that a surviving spouse can disclaim assets and then benefit from a trust into which the disclaimed assets pour.
Example: Father’s Will states that all assets pass outright to Son. The Will further states that if Son disclaims any of these assets, the disclaimed assets pour into a Disclaimer Trust for Grandson.
If your Will or Revocable Living Trust is silent on the matter, any disclaimed assets pass as if the person who disclaimed died before the decedent.
Example: Father’s Will says if Son survives him, a house passes to Son but, if Son does not survive him, the house passes to Daughter. At Father’s death, Son disclaims the house. Daughter gets the house.
Flexibility. The Surviving Spouse, knowing all the facts at the time, can choose to either take the inheritance or to disclaim into a protective trust.
Some people do not wish to give their spouse a choice. They want the assets to pour into a protective trust. These people commonly use an AB Trust.
If you have any questions about Disclaimer Trusts or any other estate planning topics, please contact us to schedule a free consultation. For more than two decades Klenk Law has focused only on Estate Law. We’ve seen it all, and this experience allows us to explain complex estate law and planning techniques clearly and concisely. We make it easy for you to understand Disclaimer Trusts and Estate Planning so you can make the best decisions for yourself and your family.