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ESTATE PLANNING:
Estate Taxes III: Estate Tax Planning in Uncertain
Times with Flexible (but Risky) Disclaimer Trusts
Disclaimer trusts are an
effective tool for building flexibility into a married couple's estate plan.
The article titled "An Introduction to Estate and Gift Taxes for the Maine
Resident" discussed the Tax Act of 2001 and explained that, for the Maine
resident who dies in 2005, $1.5 million is protected from the federal estate
tax and $950,000 is protected from the Maine estate tax. Our article titled
"Maximizing Estate Tax Savings for a Married Couple with Credit Shelter
Trusts" introduced the strategy of credit shelter trusts for married couples
that will protect up to $3 million from the federal estate tax and $1.9
million from Maine estate tax for deaths occurring in 2005.
The conventional credit shelter trust estate
plan was the typical remedy for a couple whose wealth would be exposed to
estate tax if the assets of the first spouse to die were all transferred to
the surviving spouse. In this reciprocal, simple estate plan, because of the
unlimited marital deduction, no estate tax is levied on any assets
transferred to the surviving spouse on the death of the first spouse. But
the increased wealth in the hands of the surviving spouse is exposed to
estate tax upon the surviving spouse's death - at which time only the
surviving spouse's individual applicable exemption amount is available
to
shield some of the value from estate tax. The credit that would have
been available to the estate of the first spouse to die is wasted.
The conventional credit shelter trust estate
plan mandates that a defined portion of the estate of the first spouse to
die is directed to a credit shelter trust. The trust makes the funds
available to the surviving spouse during life but then keeps those funds out
of the surviving spouse's estate upon death. The distinguishing feature of
the conventional credit shelter trust estate plan is that the portion
directed to the credit shelter trust is typically expressed in terms of the
amount exempt from the federal estate tax. For many couples, this
language is now outdated.
The Tax Act of 2001 had two consequences
for Maine residents whose estate plans were built on conventional credit
shelter trusts. First, the Act increased the federal exemption amount and
then scheduled increases ($1.5 million for 2004-05; $2 million for 2006-08;
$3.5 million in 2009) until 2010 when the estate tax is eliminated only to
return in 2011 with an exemption amount of $1 million. Second, the Maine
legislature responded to the federal Tax Act of 2001 by, in effect,
resurrecting the Maine estate tax.
The conventional credit shelter trust estate
tax plan that may have been appropriate for a couple prior to the 2001
legislation may now be either premature or unnecessary. None of us has a
crystal ball with which to predict the dates of death for each spouse and
the wealth that will be owned by each spouse on his or her death.
A better option for many married couples is
the "wait and see" approach afforded by the disclaimer credit shelter trust
estate plan. This flexible plan still allows for the use of both spouses'
credits, but the amount directed to the credit shelter trust is any amount
that the surviving spouse disclaims (that is, chooses not to accept
outright) upon the death of the first spouse. The amount directed to the
credit shelter trust is determined after the death of the surviving spouse
instead of mandated in the estate plan of the first spouse to die.
With this plan, both spouses write wills that
leave the entire estate of the first spouse to die to the surviving spouse.
The wills then provide that if the surviving spouse makes a qualified
disclaimer of his or her interest in all or a portion of the estate of the
first spouse to die, that disclaimed property passes to the credit shelter
trust.
As with the conventional credit shelter trust,
the disclaimer credit shelter trust can provide for the surviving spouse's
health, education, maintenance and support, as well as for the benefit of
the couple's children, grandchildren and other beneficiaries. The surviving
spouse may still receive substantial benefit from the trust property, but
she does not have the power to appoint the trust property upon her death.
With the disclaimer credit shelter trust
estate plan, the decision of how much use should be made of the unlimited
marital deduction and each spouse's respective estate tax credits is
postponed until the death of the first spouse. The best estate plan for a
particular couple can be determined "post mortem" with reference, at that
time, to several variables: the federal and Maine estate tax laws in effect
on the date of death of the first spouse; then-current values of the
couple's assets; and the objectives and best interests of the surviving
spouse.
The advantages and flexibility of this "wait
and see" estate plan are counterbalanced with some risks. In order to be
effective under Maine law, the disclaimer (called "renunciation" in the
Maine Probate Code) must be "an irrevocable and unqualified refusal by a
person to accept an interest in property." 18-A M.R.S.A. §2-801(b)(l). It
must be in writing and delivered to the personal representative of the
decedent's estate no later than 9 months after the date of death. If the
person who seeks to disclaim made any use of the property or accepted any
benefit or interest in the property within the pre-disclaimer period, the
disclaimer will be ineffective. If the surviving spouse fails to adhere to
the strict requirements or simply chooses not to disclaim, the estate tax
savings opportunities of this plan will be foiled.
In summary, many estate plans created before
2001 should be revisited and reviewed in light of the increase in the
federal exemption amounts and the permanent decoupling of the Maine estate
tax from the federal estate tax. The couples who are likely to receive the
most benefit from this review are those whose collective wealth is estimated
at between $1 million and below $3 million. |
