For many years, a primary reason for estate plan flexibility was because of the uncertainty surrounding the federal gift and estate tax laws. Today, however, those laws have a great deal more certainty. But that doesn’t mean estate plan flexibility is any less important.
The fact is your family’s circumstances will change in the years after your death. Let’s take a look at a few postmortem estate planning strategies that will help ensure your wishes are carried out as you desire.
Qualified disclaimers
A disclaimer is an irrevocable, unqualified refusal by a beneficiary to accept a bequest, allowing the property to pass to another beneficiary. Normally, using a disclaimer to direct property to someone else would be considered a taxable gift. But there’s an exception for “qualified” disclaimers.
To qualify, a disclaimer must be in writing, be delivered to the estate’s representative within nine months after the transfer is made (or, if the disclaimant is a minor, within nine months after the disclaimant turns 21), be delivered before the disclaimant accepts the property or any of its benefits, and cause the property to pass to the deceased’s surviving spouse or to someone other than the disclaimant, without any direction from the disclaimant.
This last point is critical and requires some planning on your part. To ensure that the disclaimant doesn’t direct the property’s disposition, the property must pass automatically to a contingent beneficiary according to the terms of your will or trust.
Spousal right of election
Another strategy for redistributing your wealth after you’re gone is the spousal right of election. In most states, a surviving spouse has the right to circumvent your will and take an elective share (one-half or one-third, for instance) of certain property. So, for example, if you leave all of your assets to your children or other beneficiaries, your spouse might exercise his or her right of election if it would produce a more favorable tax outcome. Check with your estate planning advisor to see if this strategy is applicable in your state.
Keep in mind, however, that exercise of the election with respect to property held in charitable remainder trusts may disqualify those trusts.
QTIP trust
Qualified terminable interest property (QTIP) trusts are often used to take advantage of the marital deduction while ensuring that assets are preserved for the children (particularly children from a previous marriage). They also receive some creditor protection.
Ordinarily, to qualify for the marital deduction, you must transfer assets to your spouse with no strings attached. The QTIP trust is an exception to this rule. So long as your spouse receives all of the trust income for life and certain other requirements are met, your estate can enjoy the benefits of the marital deduction while still preserving assets for your children or other beneficiaries. When your spouse dies, any remaining trust assets pass to your beneficiaries but are taxed as part of your spouse’s estate.
Even if you don’t need a QTIP trust to protect your children or preserve your assets, it may still be a good strategy. Why? Because it creates opportunities for postmortem estate planning.
To claim the marital deduction for amounts transferred to a QTIP trust, your executor or personal representative must make an election on your estate tax return. A properly designed QTIP trust gives your representative the flexibility to make the election, not make the election, or even make a partial election, depending on which strategy would produce the optimal results.
Seek professional advice
To stay on top of changing tax laws and family circumstances, periodically review your estate plan and revise as necessary. Discuss with your advisor how postmortem planning strategies can add flexibility to your plan.
