Spousal Disclaimers May Prove More Important Than Ever

by | Jun 9, 2021 | couples' estate planning

Under current estate planning law, when one spouse dies, the other can inherit all the decedent’s assets with no estate tax. What’s more, whatever portion of the first spouse’s tax credit (now $11.7 million) is unused can pass tax free to the survivor. Fidelity translates this into practical terms for business owners: “A married couple, in a properly structured estate can pass $23.4 million to children, an amount more than enough to shelter most small businesses from an Uncle Sam tax grab.”

Changes proposed by the current administration could impact this kind of planning. Not only might the tax credit itself be dramatically reduced, it has not been made clear whether unused estate planning deductions will continue to be portable.

Assume a couple’s business and other assets are owned 50-50 between them. Assuming the husband dies first, leaving everything to the wife, if there is no portability, her estate is now double in value, and the tax credit available to the first spouse to die would be wasted.
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One way to solve the problem is to use a “disclaimer trust” strategy whereby, at the death of the first spouse the assets are “offered” to the survivor. If she can receive the assets with no tax problem, she could simply accept them. However, where there is tax exposure, she could “disclaim” or waive all or a portion of the assets she’s inheriting from her spouse. The deceased’s estate would then use its exemption (the proposed new exemption amount is $5.5 million). Meanwhile, the assets would go into a special trust called a “bypass”. The survivor would be the beneficiary, with the assets she does not use passing to the children.

There is much speculation as to how many of the Biden estate tax proposals will actually be enacted, and if so, how soon..But taking action now may be better than waiting for actual tax law changes to occur, wealthmanagement.com advises.

At Geyer Law, we agree. In general, estate planning ensures control over assets and documents wishes. This year, with so many questions in play affecting business and tax planning, spousal disclaimer trusts might prove more important than ever.

– by Rebecca W. Geyer