A Disclaimer Trust is a type of trust that allows a person to refuse to accept money or an inheritance in a tax-efficient manner. To understand Disclaimer Trusts, it is important to understand what a disclaimer is and how it works.
A disclaimer is when someone chooses not to accept a gift, inheritance, interest in a trust, or certain powers. This is known as the “Disclaimed Interest.” A person can also make a partial disclaimer, such as disclaiming half of their inheritance, but special rules apply in this case.
When a disclaimer is made correctly, it is as if the person who made the disclaimer had died before the Disclaimed Interest was given. For example, if a wife disclaims an inheritance from her husband, it would be as if she had died before him for the amount she disclaimed. To be effective for tax purposes, a disclaimer must be made within nine months of the date of death and the beneficiary cannot have accepted the Disclaimed Interest.
The purpose of a Disclaimer Trust is to allow a surviving spouse to inherit money in a tax-efficient way for the descendants of the person creating the Will. For example, in New Jersey prior to 2017, it was often not beneficial for a surviving spouse to inherit everything outright due to the state’s estate tax. A Disclaimer Trust allowed the surviving spouse to have access to the funds during their lifetime but for it to pass on to the children upon their death without being subject to estate tax.
A surviving spouse should consider using a Disclaimer Trust when it would be tax efficient to do so. Factors to consider include the state’s estate tax laws, the amount of assets in the estate, and the estate tax exemption. If the assets and the estate tax exemption would not result in a significant tax burden, it may not be necessary to use a Disclaimer Trust.