Marital disclaimer trusts

See how to pass on a spouse's assets and potentially help reduce estate taxes.

  • Private Wealth Management
  • – 03/23/2022

What are marital disclaimer trusts?

A marital disclaimer trust has provisions (usually contained in a will) that allow a surviving spouse to leave assets in a trust for the benefit of their spouse by disclaiming ownership of a portion of the estate that the survivor 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 not included in 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 ($12.06 million in 2022) can be applied to the transfer of the assets to the marital disclaimer trust. 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:

  • All appreciation in the value of the assets in the marital disclaimer trust bypasses the surviving spouse's estate and will not be subject to federal and/or state estate taxes at the surviving spouse's death.
  • Portability is generally not permitted for state estate tax exclusions (for states that levy state estate tax) and the federal generation-skipping transfer tax exclusion. Therefore, without the use of a marital disclaimer trust (or traditional CST), any unused state estate tax exclusion and federal generation-skipping transfer tax exclusion of the first spouse to die will be lost.
  • Assets contained in an irrevocable trust are generally protected from the beneficiary's creditors.
  • The first spouse to die can control where the assets remaining in the trust are distributed after the surviving spouse's death (provided that they properly executed a disclaimer) rather than relying on the surviving spouse to carry out the wishes of the first spouse to die.
  

Marital disclaimer trust requirements

A marital disclaimer trust can be complicated—and has certain requirements:

  • The surviving spouse must not accept the assets or give any direction on their disposition before or after disclaiming them.
  • The election to disclaim must usually be made within 9 months of the date of death of the first spouse.
  • Provisions for the marital disclaimer trust must be included in the deceased spouse's will or trust in order for the surviving spouse to benefit from the disclaimed assets during the surviving spouse’s lifetime; otherwise, the disclaimed assets will pass directly to the next beneficiaries named in the will or trust.
  

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.