By Ron Dorner
How would you like to play a game where the rules keep changing? Whether you realize it, you are in such a game — estate planning.
Estate planning is a complex subject with laws that seem to change constantly. Can anything be done to minimize the impact of estate taxes on what you leave your loved ones? Yes, there is.
There are methods that may protect your assets and save your heirs from paying large amounts of estate taxes. However, it is imperative that you use these tools only with the advice of an estate planning attorney.
By building disclaimers into an estate plan, the beneficiary can defer decisions about the decedent’s asset distribution. When one “disclaims” assets, or a portion of the assets, the disclaimant is generally treated as if the individual predeceased the original owner of the property. Disclaimers allow decisions to be made based on estate tax laws applicable at the time of distribution, thus minimizing estate taxes.
When the first spouse of a couple dies, he or she can leave unlimited assets to the other spouse. But that will cause the individual’s estate tax exemption to be lost.
A credit shelter trust can preserve that tax exemption, effectively doubling the amount upon which the couple will not pay taxes. The federal tax law is currently structured to change that exemption over future years. There is no way of knowing what it will be in the year the first party dies. Also there are some restrictions upon the surviving spouse using the funds in the trust. A better approach might be to leave the entire estate with instructions to the surviving spouse. Then any amount the survivor decides to disclaim will be used to fund the credit shelter trust.
In some states, the amount allowed in the credit shelter trust will differ from that allowed by federal tax law. Using a disclaimer can save the surviving spouse significant state taxes.
Joint property (which does not go through the estate) can also be disclaimed under federal law. If disclaimed, that half of the property would go into the decedent’s estate and could be used to fund the credit shelter trust.
Even individual retirement accounts (IRAs) can use disclaimers. For example: “To my wife if she survives me. If she disclaims, the IRA goes to the credit shelter trust of which my wife is beneficiary. If she dies before me, the IRA goes outright to the children in equal shares, per stirpes.”
By being aware of the tools that are available in estate planning, you may be able to save your loved ones and your estate thousands of dollars. If you have questions, seek help from a licensed attorney.
One final note. If you prepare documents using disclaimers it is very important to tell your beneficiaries to get good legal/tax advice prior to deciding whether to disclaim or not.
Ron Dorner is director of Biblical Money Management. BMM has been helping believers handle their finances and estate planning since 1984. Online counseling is available at www.BiblicalMoneyManagement.com.