August 2024:
The MLO Minute: “Using a Disclaimed Property Trust in Estate Planning: Flexibility in Uncertain Times”
By, Lesley M. Mehalick, J.D., LL.M., Supervising Partner of The Estates and Trusts Department —
Estate planning can be challenging, especially with potential changes to tax laws on the horizon. One effective tool that provides flexibility in this uncertain environment is the Disclaimed Property Trust (DPT). This trust structure allows families to adapt their estate plans to changing circumstances and potentially minimize estate taxes.
A DPT is created as part of a will or living trust. It designates a primary beneficiary, typically a surviving spouse, and contingent beneficiaries, often children or other heirs. The key feature of a DPT is that it is an optional trust, meaning that it gives the primary beneficiary the option to disclaim (refuse) all or part of the inheritance, which then passes to the trust for the benefit of the contingent beneficiaries. The DPT allows for income to be distributed to the surviving spouse while preserving principal for future generations and can provide for professional management of assets if needed.
Most estate planning must be done during your lifetime, but the DPT offers one of the few opportunities to engage in post-mortem planning after the death of the first spouse. After the first spouse passes, the surviving spouse can evaluate the Federal Estate Tax exemption, their available assets, and their personal family situation at that time and determine whether it would make sense to fund and utilize this trust given all of their circumstances.
This structure is particularly valuable given the potential changes to the Federal Estate Tax. Currently, the estate tax exemption is historically high, but it’s set to decrease significantly in 2026 unless Congress takes action. A DPT provides the flexibility to respond to such changes after the death of the first spouse.
If the estate tax exemption remains high, and if portability remains in the law, the surviving spouse might choose to accept the entire inheritance, potentially using their own exemption and their spouse’s “ported” exemption, to pass on assets tax-free to heirs later. However, if the exemption is lowered, the spouse could disclaim some assets, allowing them to pass directly to the next generation or into the trust, potentially saving on estate taxes.
Implementing a DPT requires careful consideration and professional guidance. The trust must be properly structured, and the disclaimer must meet specific legal requirements to be valid. The surviving spouse must also understand the implications of accepting or disclaiming assets, and as such, counsel should be obtained after the passing of the first spouse to determine whether to fund this trust. While a DPT offers significant advantages, it’s not suitable for every situation. Factors such as family dynamics, asset types, and overall estate size should be considered. However, for many families facing uncertainty about future tax laws, a Disclaimed Property Trust can provide valuable flexibility in their estate plans.
