Disclaimer Trust vs. Credit Shelter Trust

Married couples seeking estate planning advice are generally concerned with providing for their surviving spouse and heirs while eliminating or reducing the payment of estate tax on their assets. The marital deduction and estate tax exemption provide, to a certain extent, the ability to avoid or defer estate tax in certain situations. However, there are limitations to both of these options. In more complex situations, whether the complexity arises out of a family situation or the size of the estate, it is beneficial to consider different trust vehicles in estate planning. Two popular options are the credit shelter trust and the disclaimer trust.

The Credit Shelter Trust.

A credit shelter trust, or bypass trust, preserves the estate tax exemption of both spouses. With a credit shelter trust, Spouse A's estate is divided between the trust and the surviving spouse. Assuming that the assets placed in the trust fall within the $5,250,000 estate tax exemption equivalent, the trust assets, including any appreciation of these assets, will be exempt from estate tax forever. Any remaining assets in the estate can be passed tax-free to Spouse B using the marital deduction. Because Spouse B does not exercise any control over the assets in the credit shelter trust, the value of trust assets will not be included in Spouse B's estate. At Spouse B's death, the assets in the trust will pass to the beneficiaries named by Spouse A and the remaining assets in Spouse B's estate will be able to utilize the estate tax exemption to limit any estate tax liability. Credit shelter trusts are useful in situations where the parties have been married multiple times because it allows the deceased spouse to take care of their current spouse during their lifetime, but also name children from an original marriage as the ultimate beneficiaries of the trust.

The Disclaimer Trust.

A disclaimer trust is established in a donor's will. It does not create a specific type of trust, but rather, it gives the surviving spouse the option to elect to create a trust, including a credit shelter trust, after Spouse A passes away. Surviving spouses have up to nine months to determine the most beneficial method of distributing Spouse A's estate. If the surviving spouse and their advisers determine that creating a trust is necessary, the surviving spouse files a disclaimer that irrevocably eliminates the surviving spouse's ownership interest in the estate assets listed in the disclaimer document. The disclaimer of assets can be full or partial. The disclaimed assets are then put in trust for designated beneficiaries. If the surviving spouse fails to file the disclaimer, then the trust fund will have no assets in it and all of the deceased spouse's assets will become part of the surviving spouse's taxable estate. The benefit of a disclaimer trust is its flexibility. This flexibility can be important because it allows estates to choose the best estate planning method based upon the current value of the estate and the current tax laws and regulations.

Credit Shelter Trust vs. Disclaimer Trust.

A disclaimer trust is a popular option, especially in less complex estates, because it provides ultimate flexibility to the surviving spouse and allows the couple's estate to be administered in the simplest way possible to achieve favorable tax treatment. Disclaimer trusts are generally used with couples on their first marriage when both spouses are comfortable making financial decisions. Credit shelter trusts are immediately created upon Spouse A's death and, therefore, are not as flexible as disclaimer trusts. Credit shelter trusts are useful in situations where donors desire control over the ultimate disposal of their estate. They are particularly useful for couples that have children from a previous marriage or where the donor has concerns that the spouse may be subject to undue influence from another party.

Thorough estate planning involves having a complete understanding of a couple's marital, family and financial status. In some instances, a simple estate plan will be all that is required. However, when planning for larger or more complicated estates, it is beneficial to understand the benefits and risks of various trusts, including disclaimer trusts and credit shelter trusts.

 Beyond Counsel's consultants love talking legal tech. 


Go Beyond a Demo with an hour-long review of your firm's technology.

You have Successfully Subscribed!