How a Disclaimer Trust Works and Why Use One

1.  To “disclaim” means a person chooses not to accept an inheritance (such as when the survivor is listed as a beneficiary in a will, as a beneficiary in a trust, or as a beneficiary of a life insurance policy, annuity, 401k plan, or IRA).  If a person validly and timely “disclaims” an asset, then the IRS views it as though the person disclaiming never “owned” the asset (and the asset thus passes from the deceased person directly to the next person/charity/trust listed as the successor beneficiary.)

2.  A person “disclaims” by signing a special document (a disclaimer) where you irrevocably state that you choose not to accept the assets specifically listed in the disclaimer document. You can partially disclaim or you can fully disclaim. 

Example 1:  Wife Pam’s will states that all of her shares of Pepsi stock go to her husband Tom.  Pam dies owning 3,000 shares of Pepsi stock.  Tom can disclaim 22 shares, 100 shares, 1,542 shares, all 3,000 shares, or any other number of the shares.  

Example 2:  Husband Hal’s trust states that all trust assets go to his wife Jan (but if she disclaims any assets, then those disclaimed assets shall remain in a disclaimer trust for Jan’s lifetime).  When Hal dies, his trust owns a rental home (Blackacre) and a commercial building (Whiteacre).  Jan can accept ownership of both Blackacre and Whiteacre.  Jan can accept ownership of Blackacre, and she can disclaim Whiteacre (allowing Whiteacre to remain in the disclaimer trust).  Jan can accept ownership of Whiteacre and she can disclaim Blackacre.  Jan could disclaim both Blackacre and Whiteacre. Jan could accept partial ownership of Blackacre (such as one-third or one-half) and/or Whiteacre (such as one-quarter or three-quarters). 

Example 3:  Joe dies and his trust states that all of his Fanta stock goes to son Mike per stirpes.  If Mike disclaims any of the Fanta stock, then it will go to Mike’s children.  If Mike is well off financially, then Mike might choose to disclaims some or all of the stock so that his children will become stock owners.  (This is an example of a disclaimer in a non-spouse situation.)

3.  A disclaimer trust is established where Husband dies leaving assets to his surviving Wife.  Wife chooses not to accept all of Husband’s assets.  Wife signs a disclaimer document stating which assets she won’t accept.  Husband’s will or trust states that if Wife disclaims any assets, then those disclaimed assets shall remain in a disclaimer trust to provide specific benefits to the Wife during her lifetime (see # 6 below). 

4.  Disclaimer trust language can be put into a will or a revocable trust, stating that if the surviving spouse disclaims, the disclaimed assets can remain in a “disclaimer trust” to benefit the surviving spouse.  The purpose of setting up the “disclaimer trust” is because the assets of the disclaimer trust aren’t counted as belonging to the surviving spouse when he or she dies (and thus the disclaimer trust assets aren’t subject to inheritance tax when the surviving spouse dies). 

5.  The surviving spouse can be the sole trustee of the disclaimer trust or a co-trustee of the disclaimer trust (or another person could be the sole trustee).

6.  The disclaimer trust can provide the following benefits to the surviving spouse:

          (a)  all income can be given to the surviving spouse

          (b)  the trust principal can be available for the surviving spouse’s educational expenses, health expenses, and support & maintenance (meaning normal living expenses: food, clothes, housing costs, utility bills, etc.) or in ways to benefit the surviving children

7.  The surviving spouse should not be given a “limited power of appointment” to have authority to change the ultimate beneficiaries (the persons or charities who receive the disclaimer trust assets when the surviving spouse dies).  

8.  The surviving spouse has nine (9) months under federal law to decide whether to accept the assets left to him/her or to disclaim.  The nine months begins when the person owning the asset dies.

Example 1:  Joe owns a home and dies on January 15^th this year.  The nine months begins on the day that Joe dies.

Example 2:  Sam and his wife Brenda own a vacant lot as joint tenants with right of survivorship.  Sam dies on July 5^th this year.  Brenda has 9 months from July 5^th to disclaim the one-half interest in the real estate that Sam owned.

Example 3:  Linda dies on August 7^th this year.  Linda’s trust owns 1,200 shares of Microsoft stock.  The trust states that those stock shall be distributed to her son James per stirpes.  James has 9 months from Linda’s date of death to decide whether to accept ownership of all of the stocks, accept ownership of part of the stocks (and disclaim part), or disclaim all of the stocks.

9.  Once a person accepts ownership of an asset, then the person can’t disclaim that asset. 

Example 1:  Wife Nan dies and her trust states that all of the trust assets pass to her husband Jim.  Nan’s trust owns 500 shares of ABC stock.  Nan’s trust also owns 99 shares of XYZ stock.  Four weeks after Nan’s death, Jim transfers all of the ABC stock into Jim’s revocable trust.  Jim didn’t consult with a lawyer to discuss whether Jim should disclaim any of Nan’s assets.  Seven weeks after Nan dies, Jim decides to see an attorney.  Jim is wondering whether he can disclaim the ABC stock.  No, it is too late because Jim already transferred the stocks into Jim’s trust.  (Jim may disclaim any of the XYZ shares because those haven’t been transferred out of Nan’s trust yet.  Jim hasn’t made the XYZ stocks his yet.)  

Example 2:  Father Sam dies and his will states that his vehicle goes to his daughter Lois.  Lois has the vehicle transferred into her name. 

10.  By using the disclaimer trust method (rather than automatically requiring that some of the deceased spouse’s assets be held in a trust for the surviving spouse), the surviving spouse can choose (a) which assets he or she accepts as his/her own, and (b) which assets he or she desires be in the disclaimer trust. 

11.  The surviving spouse should consult with a lawyer within a few weeks of the death of the first spouse to die.  The pros and cons of creating a disclaimer trust should be discussed so that the surviving spouse can make an educated decision.