What are marital disclaimer trusts?
A marital disclaimer trust has provisions (usually contained in a will) that allow a surviving spouse to put assets in a trust by disclaiming ownership of a portion of the estate that they would have inherited after the death of the first spouse. The disclaimed property is transferred to the marital disclaimer trust, which can then benefit the surviving spouse during their life, without being included in the surviving spouse's estate at death.
The marital disclaimer trust is similar to a credit shelter trust (CST): Assets placed in the trust are generally held apart from the estate of the surviving spouse, so that the assets may pass tax-free to the remaining beneficiaries when the surviving spouse dies. However, unlike most CSTs, the use of a marital disclaimer trust is optional after the death of the first spouse, thereby providing valuable flexibility.
How do they work?
Because transfers to surviving spouses are generally free from federal estate tax, marital disclaimer trusts, like CSTs, can be used instead of the unlimited marital deduction. If the surviving spouse disclaims assets they would otherwise receive, the assets are transferred to the marital disclaimer trust. The deceased spouse's lifetime gift and estate tax applicable exclusion amount ($11.7 million in 2021) can be applied to the marital disclaimer trust assets as a credit against the estate taxes incurred on the assets. The marital disclaimer trust then shelters the assets, and any appreciation in the value of the assets, from inclusion in the surviving spouse’s estate.
A marital disclaimer trust vs. a traditional CST
The funding of a more traditional CST is often required by the will or trust based on a preset formula or amount; if properly drafted, the use of a marital disclaimer trust is optional, which provides valuable flexibility. At the time the first spouse passes away, the surviving spouse may have a better idea as to whether credit shelter planning is needed based on the size of the estate and the tax laws then in effect. The surviving spouse can take that information into account when making the decision whether to file a disclaimer—and, if so, for how much.
However, a marital disclaimer trust is not always more beneficial than a traditional CST. For example, a marital disclaimer trust does not allow the surviving spouse to have a limited power over the trust to direct where the trust assets will be distributed at the surviving spouse’s death. Such a loss of flexibility (e.g., dealing with situations occurring after the death of the first spouse) may be significant.
A marital disclaimer trust vs. portability
By electing portability, a surviving spouse can take advantage of any unused portion of the first-to-die spouse's applicable exclusion amount for their own gift or estate tax purposes.* Although relying on portability may be easier than creating and administering a marital disclaimer trust, a marital disclaimer trust has several advantages over electing portability:
Marital disclaimer trust requirements
A marital disclaimer trust can be complicated—and has certain requirements:
A marital disclaimer trust can provide a lot of flexibility, but the use of a marital disclaimer trust comes with responsibility. Work closely with your attorney to make sure all federal and state requirements of a qualified disclaimer are met.