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What is a Disclaimer Trust? 

November 21, 2022

What is a Disclaimer Trust? 

There are many legal options and structures that a person can take advantage of during the estate planning process. One example of a little-known estate planning structure is the disclaimer trust. Disclaimer trusts can help a family minimize estate and inheritance taxes.

Estate and Inheritance Taxes

An estate tax is a tax levied on the assets of a deceased individual’s estate before the assets are distributed to the decedent’s beneficiaries or heirs. While New Jersey repealed its estate tax, the federal government only imposes estate taxes on estates over $12 million, meaning that very few estates are subject to any tax, although the threshold for estate taxes is expected to be significantly lowered in the coming years.

Conversely, an inheritance tax is paid by beneficiaries and heirs after they have received their inheritance of a decedent’s estate. The federal government does not impose an inheritance tax, while New Jersey imposes inheritance taxes that are based on the beneficiary’s relationship to the decedent, the date of death, the value of the assets, the type of assets involved, and whether the decedent lived in New Jersey at the time of their death.

What is a Disclaimer Trust?

A disclaimer trust is a specific type of irrevocable trust that allows a decedent’s surviving spouse to “disclaim” a portion of the decedent’s estate. Irrevocable trusts are trusts that cannot be amended or terminated after their creation; they are frequently used in estate planning to minimize tax liabilities. In a disclaimer trust, the disclaimed portion of the estate is then poured over into the disclaimer trust set up by the decedent during their life. The assets held by the disclaimer trust can be used to generate income which may be paid out to the trust’s beneficiaries. However, a surviving spouse typically has only nine months from their deceased spouse’s passing to disclaim assets.

How a Disclaimer Trust Can Help You Avoid State Inheritance Taxes

With a disclaimer trust, a person assigns their entire estate to their spouse with the stipulation that their spouse, if they survive the grantor, may “disclaim” or reject any part of their inheritance from the grantor’s estate. Rejected assets are then transferred to the irrevocable disclaimer trust, which is controlled by the surviving spouse. The surviving spouse and any other beneficiaries of the trust can then receive the income generated by the trust assets.

Disclaimer trusts are frequently used to bring the value of a decedent’s estate below the threshold for estate taxation or to avoid state inheritance taxes. 

Other Options Besides Disclaimer Trusts

Spouses have other estate planning and tax planning options to help minimize estate and inheritance taxes. For example, spouses are permitted under federal tax law to carry over federal estate tax exemptions. If one spouse passes away with an estate below the federal exemption cap, the estate can file a federal tax return that elects to allow a surviving spouse to carry over any unused portion of the deceased spouse’s exemption. The surviving spouse can add the deceased spouse’s unused exemption to the surviving spouse’s exemption when they pass away to increase the value of assets the surviving spouse’s estate may exempt from federal taxation.

Contact a Fort Lee Estate Planning Attorney for a Consultation in New Jersey

You deserve to have peace of mind about whether your loved ones will be taken care of after you are gone. The best way to plan for your future, and the future of your close family members or other loved ones, is to speak with an estate planning lawyer about your specific circumstances and financial situation. The experienced New Jersey estate planning attorneys at Choi Law Firm assist clients with wills, trusts, and other estate planning documents. We represent clients in Bergen County, Hudson County, Queens County, NY, Long Island, and throughout New Jersey and New York. Call us anytime at 888-501-5876 or fill out our online contact form to schedule a confidential consultation. Our main office is located at 1372 Palisade Avenue, 2nd Floor, Fort Lee, NJ 07024, and we also have offices located in Bayside, NY.

The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact our law firm directly.

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