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Marital Deductions and Disclaimer Planning in DC

Marital deductions and disclaimer planning in DC allow married couples to minimize their exposure to estate taxes. To better understand how they work and whether they are viable options, it is important to consult a knowledgeable estate planning lawyer.

What Are Marital Deductions and Disclaimer Planning?

The marital deduction is the ability of married couples to pass on an unlimited amount of assets between themselves either during their lifetime or after death estate tax-free. However, it is not available to everyone. It requires that both married couples be U.S. citizens and U.S. residents.

Marital deductions and disclaimer planning are similar. In general, disclaimer planning maximizes the use of a marital deduction. It is about taking the marital deduction and the exemption and using them to protect a client’s assets from exposure to estate taxes. An attorney can further explain how to maximize these deductions.

Creating Disclaimer to Bypass Trust Will

Marital deduction planning is one of the concepts that attorneys utilize to minimize the impact of estate taxes. Some of the ways they do that is to sometimes use what is called a disclaimer to bypass trust will. A disclaimer to bypass trust will is a flexible document that allows the surviving spouse to disclaim their inheritance in the first spouse’s estate at the death of the first spouse. Any amount that is disclaimed is then funded pursuant to the decedent’s last will and testament into a trust for the surviving spouse. Sometimes, the surviving spouse will serve as the trustee, and the surviving spouse will have access to the trust assets for their health, education, maintenance, and support.

The benefit of funding the bypass trust is that the assets in the trust utilize the exemption of the first spouse to die. Given that DC does not have portability yet, this is a way to maximize the use of both spouse’s exemptions. The other benefit is that any assets funded into that disclaimer trust are already considered taxed for both DC and federal estate tax purposes. In other words, the surviving spouse would disclaim the assets and would have the benefit of using their exemption. However, it may be more prudent to spend down their individual assets so that there is even less exposure to estate taxes. Regardless of the amount that has been held in trust, it has already been considered taxed at the death of the first spouse and the death of the second spouse.

Disclaimers have a lot of requirements to be valid. A disclaimer is created by an individual or the surviving spouse after death and permanently gives away the asset. The attorney has already created the mechanism in the decedent’s will for the asset to fall into a trust for the spouse. Disclaimers must be done within nine months from the date of death and must be in writing. It is also important to note that they are irrevocable meaning an individual cannot disclaim the asset now and then reclaim it later. The disclaimer also cannot direct where the disclaimed asset is going to go. Most importantly, the surviving spouse cannot have accepted the assets, meaning they cannot take life insurance policies and later disclaim them.

Benefits and Disadvantages of Disclaiming Assets in DC

It is a very flexible way, in most cases, for DC residents to be able to do some estate tax planning to protect their estate without doing a lot of gifting or giving away assets during their lifetime and also without changing titles of any of their assets. The other benefit is that no decisions have to be made with regard to whether the bypass trust will be funded to the death of the first spouse. When the attorney has an opportunity to review how much of assets the married couple has, what the current estate tax law is, what the needs of the surviving spouse are, and what us necessary to make an educated decision on how they are going to treat the assets at the death of the first spouse, it is a winning situation for all concerned parties.

There are no disadvantages to a marital deduction, but it is important to know that it is not available to everyone. There are some citizenship requirements and residency requirements. For individuals who are not eligible for the marital deduction, an attorney can create what is called a QDOT or a qualified marital disclaimer trust that protects some assets from estate taxes in the event the surviving spouse is not eligible for the marital deduction. However, all planning needs to be done in advance of an individual or one of the spouses dying.

Ask an Attorney About Marital Deductions and Disclaimer Planning in DC

Marital deductions and disclaimer planning in DC can protect you and your spouse from unnecessary tax liability. However, there are limits to who these options are available to. Discuss whether you qualify by calling today for a free consultation.