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What is a Disclaimer Trust and Should We Consider it to Replace Our Existing Trust?

What is a disclaimer trust and should you consider replacing older trusts with a disclaimer trust?  There has been a lot of conversation (and misinformation) on this topic, and it is important for our clients to understand the advantages and disadvantages of each option available to them as they plan their estate.  Allen Barron is uniquely positioned to guide our clients through these conversations.  We provide the deep legal expertise required to protect your family’s assets, while supporting your decision with insight from our accounting and tax teams as well.  The purpose of any trust is to protect assets from exposure to creditors and liabilities, while reducing or avoiding associated tax exposure.  Most spouses want to ensure that the surviving spouse has enough resources to live their life, receive medical care and live comfortably after the loss of the first spouse.

The questions arise when you consider the beneficiaries and heirs, and the legacy you wish to ensure.  Today, there is a much higher percentage of “blended” families due to divorce and remarriage.  Spouses may have children of their own from a previous marriage, and in many cases share a family with their new spouse as well.  This can become quite complex from the perspective of estate planning.  Most traditional revocable trusts were known as “A-B trusts.”  When spouse “A” passed away, half of the assets of the couple were in effect locked into an irrevocable trust that would pass to the beneficiaries and heirs upon the passing of the second spouse.  The remaining half of their assets would be used to provide a comfortable standard of living, health care and meet the life expenses of the surviving spouse “B” until he or she ultimately passed.  The passing of the second spouse activated the transfer of property, assets and wealth contained within the trust to the beneficiaries based upon the instructions contained within the A-B trust.

A disclaimer trust changes the disposition of assets at the time of the passing of the first spouse.  Instead of arbitrarily locking up half of the couples assets, a disclaimer trust allows the surviving spouse nine months to decide how much of their assets will bypass taxes, and be “disclaimed” in the eyes of the law and taxation authorities.  This could allow the surviving spouse to retain control over more of the couples joint assets.  People are living longer, and the costs associated with retirement and healthcare continue to climb. The disclaimer trust provides more flexibility  over control of joint assets.

So what are the potential disadvantages of a disclaimer trust?  Lets consider the “blended family” scenario.  What protections does the first spouse to pass away have with regard to the provision for their own children?  How do you protect your heirs from someone who would attempt to gain influence over the surviving spouse and deplete assets meant for your heirs? Most importantly, how do you preserve the greatest amount of your assets to provide for the genuine needs of your family, while minimizing or eliminating taxes and preserving an estate to pass on as your legacy?

These issues can be a bit complex, and it is important to work with a counselor who can provide the insight from every perspective: legal, tax and financial. We invite you to contact the experienced team at Allen Barron for a free consultation at 866-631-3470.  It is time to update your family’s trust documents and ensure that your affairs are in order and the needs of your family are protected.