Using Disclaimers in Estate Planning: Examining the Austen Family

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My colleague Hether Cahill previously discussed the use of a disclaimer exercised by a conservator for a single transaction. As Hether mentioned, disclaimers can be an excellent estate planning technique.

A disclaimer is a refusal of something before it is received and is most commonly used for estate or gift tax savings. Section 2-801 of the Massachusetts Uniform Probate Code outlines the mechanics of properly exercising a disclaimer. For example, a disclaimer must be in writing and executed and filed no later than nine months after the qualifying event – which, in the case of the Austen family, is Jack’s death. A disclaimer must also be filed with the Probate Court and a copy delivered to whomever has possession of the property being disclaimed – frequently, the Personal Representative.

Property may not be disclaimed if a beneficiary has accepted the property or exercised any action that could be interpreted as ownership. In the case of the Austen family, if, for example, Jack had a bank account titled in his name alone and the bank retitled the account in Juliet’s name, Juliet would not be allowed to subsequently disclaim the account. Property also may not be disclaimed if the beneficiary executing the disclaimer is insolvent.

As mentioned in the fact pattern, Jack created a trust that would hold assets for the benefit of Juliet after his lifetime. Assume the trust that Jack created for Juliet was a standard A/B trust meaning that the trust consisted of two potential trust funds. The first, the credit shelter trust, would hold assets valued up to the Massachusetts exemption amount ($1,000,000) reduced by the lifetime gifts made by Jack. The assets held in this credit shelter trust would be excludible from Juliet’s taxable estate on her death. The second trust, the marital trust, would hold assets in excess of the Massachusetts exemption amount, a portion of which could be excludible from Juliet’s federal taxable estate. If Juliet had received Jack’s assets outright, none of the assets would have been excluded from her taxable estate. However, by disclaiming – through a conservator – assets passing to her, Juliet retained the benefit of the assets during her lifetime while potentially decreasing her taxable estate on her death and allowing for greater wealth to pass to her children.

Disclaimers are complicated and can require the advice of legal counsel and tax and financial advisors. In the event that you are considering the use of a disclaimer as part of your estate plan, it is important to consult an experienced attorney to ensure that it is properly implemented.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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