Effectively utilizing disclaimer trust

Sometimes re-gifting is actually good manners, and good tax law.

Many couples present a unique challenge because they are slightly over or slightly under the Minnesota estate tax exemption of $1.6 million.  Other younger couples may not be close to the $1.6 million Minnesota estate tax exemption right now, but over time they could easily exceed that number in their gross estate.

I am always concerned for these couples because even if they are under the Minnesota estate tax exemption, as mortgages and other debts are paid down, and property values go up, a couple's gross estate can increase in value quickly without much effort.

Understandably, many couples do not want to be overly aggressive in their estate planning by drafting documents and forming entities that they might not use.  Additionally, many couples may spend down their assets in later years and not have a taxable estate.

Disclaimer Trusts are a great way to handle this situation.  They can be inserted into wills, or into revocable lifetime trusts.

Disclaimer Trusts are essentially an optional Qualified Terminable Interest Property Trust (also known as a QTIP Trust).  What this means is that the surviving spouse would make an election at the death of the first spouse to not receive assets in an amount that exceeds the Minnesota estate tax exemption.  The deceased spouse $1.6 million exemption would be utilized in full on the first $1.6 million in assets, as those assets go directly to the surviving spouse.

The disclaimed amount, or excess above $1.6 million, would then be placed into a trust where the surviving spouse would receive income from that trust for life based upon an ascertainable standard for health, education, maintenance, and support.  This is called the HEMS standard. 

Also, the surviving spouse is typically granted a limited power of appointment.  Thus, the surviving spouse could appoint this property to a limited class of beneficiaries that is decided upon during the estate planning.

This strategy keeps open the option for the surviving spouse to reduce or eliminate estate taxes at the death of the first spouse while not unnecessarily committing to additional estate planning that may prove unnecessary in future years.

mount that exceeds the Minnesota estate tax exemption.  The deceased spouse $1.6 million exemption would be utilized in full on the first $1.6 million in assets, as those assets go directly to the surviving spouse.

The disclaimed amount, or excess above $1.6 million, would then be placed into a trust where the surviving spouse would receive income from that trust for life based upon an ascertainable standard for health, education, maintenance, and support.  This is called the HEMS standard. 

Also, the surviving spouse is typically granted a limited power of appointment.  Thus, the surviving spouse could appoint this property to a limited class of beneficiaries that is decided upon during the estate planning.

This strategy keeps open the option for the surviving spouse to reduce or eliminate estate taxes at the death of the first spouse while not unnecessarily committing to additional estate planning that may prove unnecessary in future years.