Understanding Disclaimers in DC

If you are looking to maximize your estate tax exemptions in DC, disclaimers may be a good option. This type of estate planning allows you to move estates into a bypass trust to help maximize your exemptions. To better understand this option, it is important to speak with a knowledgeable lawyer.

What Is a Disclaimer?

A disclaimer is an irrevocable giving away of a person’s right to inherit. Disclaimer planning can be useful to maximize a couple’s estate tax exemptions, but in order to work, the language for providing for what happens to a disclaimed asset must be included in the decedent’s documents. The most common type of disclaimer planning is called the disclaimer to bypass trust will.

Essentially, for a married couple, one spouse leaves everything to the other, but if the spouse receiving the assets has disclaimed, the shares would be held in a bypass trust for the spouse’s benefit. Typically, the trust can make distribution of the income and the principal to the surviving spouse for health, education, maintenance, and support. Generally, those assets are considered taxable at the death of the second spouse.

This means that, at the death of the first spouse, there would be no estate taxes because of the marital deduction, which allows for an unlimited number of gifts to be made between spouses either during their lifetime or at their death in the event that the surviving spouse is also a US citizen. At the death of the second spouse, they will be holding the entire $10 million of the couple’s wealth but would only have the $5 million exemption allocated to them, which would mean that they would have roughly $5 million that would be subject to the DC estate tax.

If disclaimer planning is used correctly, the surviving spouse would have an option to disclaim interest, a portion of assets would move to a disclaimer trust or a bypass trust for their benefit. This could mean that there are no taxes to pay upon the second spouse’s deaths. This would allow the married couple to take advantage of both spouses’ exemptions rather than using just the exemption of the last spouse to die. The main benefit of the disclaimer is that it allows for a married couple’s assets to pass on to the next generation with reduced or no estate taxes.

Requirements for Disclaimers

There are some very specific rules surrounding the execution of a disclaimer, which can make it complex. The first is that a disclaimer is irrevocable. Once the spouse signs the disclaimer, they cannot reverse their decision. To be qualified, the disclaimer must be within nine months from the date of the decedent’s death.  The disclaimer must also be in writing and must be signed within nine months from the date of the death to affect the estate taxes. The disclaimee, the person disclaiming, also cannot direct where the disclaimed assets go, and the disclaiming person cannot have expected the asset.

Meaning, if an individual passes away and the surviving spouse begins to collect all the life insurance proceeds or to change the names and the bank accounts, they cannot later go back and disclaim the asset. It is important for them to have this planning in place while both spouses are still living and for the surviving spouse to contact an attorney quickly after the death of the first spouse. While this planning is very flexible, because no decisions have to be made until the death of the first spouse, it is important that the specific requirements for the disclaimer are met.

Discuss Disclaimer Planning with a DC Attorney

A disclaimer is one way to help minimize the impact of estate taxes in DC. However, there are strict requirements you must meet for a disclaimer to be valid. To discuss your options, call today for a consultation.