How does the New Tax Act Affect my Estate Plan?


Before the 2001 tax Act, most attorneys recommended tax planning through a will or trust for married clients whose combined taxable estates totaled more than approximately $750,000. Most often, this tax planning involved the use of a trust which would hold the deceased spouse’s estate to the extent the value of the estate did not exceed the exemption equivalent available to the deceased spouse’s estate ($1,000,000) in 2001. This trust is frequently called a bypass trust or credit shelter trust. The assets held by the bypass trust are excluded from the surviving spouse’s taxable estate at the surviving spouse’s death.


In order to maximize flexibility and manage the competing goals of minimizing both estate and income tax consequences, the disclaimer, an under utilized estate planning tool, should be considered. A disclaimer is a document that allows a devisee to refuse to take property given to him or her in a will or trust. The property then passes as if the disclaiming devisee predeceased the testator. In some cases, especially in traditional family situations, documents should now provide that all assets pass outright to the surviving spouse, and in the event the surviving spouse disclaims assets, the disclaimed assets pass to the bypass trust. This would allow the surviving spouse more flexibility in her approach to tax planning.


While the disclaimer gives the surviving spouse more flexibility, potential drawbacks should be considered. First, if the surviving spouse chooses to disclaim property into the bypass trust, she cannot be the trustee of the bypass trust. Second, since a disclaimer must be filed within nine months from the date of death, the spouse must make a calculated decision at a very emotional time.


Third, the surviving spouse may not prioritize tax planning as highly as the decedent and might choose not to disclaim property even when disclaiming property into the bypass trust makes good sense. Fourth, when the surviving spouse inherits assets outright, the distribution of those assets are governed by the surviving spouse’s will or trust at her death. Consequently, the spouse who dies first may not be able to predetermine with certainty who receives his or her assets upon the death of the surviving spouse, as the surviving spouse inherits outright and may or may not choose to disclaim those assets into the bypass trust. This can be an important drawback to the disclaimer approach in blended families.


In sum, if you are married and your combined estates total more than $1,000,000 or if you have tax planned wills or trusts, regardless of the value of your combined estates, it is important for you to have your documents reviewed in light of the new Act. Further, the emerging importance of income tax avoidance, as the estate tax is phased out, warrants heightened vigilance with regard to your estate plan.

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