Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.
Disclaimer provisions inside estate plans are growing in popularity these days, and it's not difficult to see why. With the specifics of the federal estate tax changing almost every year between now and 2011 (and a number of states "decoupling" their own taxes from the federal system), it's never been more difficult to get a fix on the death tax.
A disclaimer provision written into a will allows a surviving spouse-who could inherit all the couple's assets tax-free, if he or she wanted-to give away, or "disclaim," a portion of that estate within nine months of the first spouse's death. This flexibility allows a couple to take advantage of the estate-tax exemption for both spouses, if needed. For business owners with significant assets, this is a key distinction.
There's nothing particularly new about the technique of putting some assets in a trust and passing others to the spouse at death. For decades, estate planners have used credit-shelter trusts, or bypass trusts, to do much the same thing. But with the federal and state estate-tax exemption amounts now shifting year by year, it's difficult for a credit-shelter trust to keep up with the times. You either need to rewrite your estate plan annually, or you need flexibility built into it.
Enter disclaimers. The idea is to give the surviving spouse a decision about how much of an estate to keep and how much to put permanently beyond the reach of the estate tax by putting it into a trust. It can make sense to place up to the federal exemption amount ($1.5 million in 2004) into a trust so that those assets avoid the estate tax. But the disclaimer provision also allows the surviving spouse to make sure he or she has enough to live on before making that call.
Fair warning: Disclaimer provisions are no panacea. For instance, the surviving spouse has to be careful not to use any of the assets in the period of time before he or she disclaims them in writing. The survivor also has to make financial decisions during a very emotional time. It's possible he or she might elect not to disclaim anything, for instance, undermining even the best-laid estate plan.
Disclaimers are no more perfect than any other financial planning tool, in other words. But as the death tax gets increasingly muddled over the next seven or eight years, they will of necessity become more and more common.
Scott Bernard Nelson is deputy business editor at The Oregonian and a freelance writer in Portland, Oregon.