First, let’s distinguish between a disclaimer trust (common noun) and a Disclaimer Trust (proper noun). Generally, a disclaimer trust is a category of sub-trust under family trusts used to maximize marital estate tax exemptions. That’s because maximizing tax savings is one of the category of trust’s primary benefits. To capture that benefit, a surviving spouse (SS) disclaims their interest in property they would otherwise inherit upon their spouse’s passing. It’s important to note that effectively disclaiming an interest requires the SS to make the disclaimer in writing within 9 months of the first spouse’s passing.
There are other benefits too. Sometimes, a family trust will be set up already as an “ABC trust”—a kind of trust that already plans for maximizing marital estate tax exemptions by splitting into three separate trusts upon the first spouse’s passing. In that case, the “C” trust (sometimes called the Marital Q-TIP Trust) is used for the tax exemption purpose. So, if the family trust also provides for the creation of a separate Disclaimer Trust (proper noun), the purpose is generally beyond mere tax savings.
Beyond tax savings, disclaiming interest in inherited property can also protect the assets from creditors or adverse judgment if there is a pending or impending lawsuit against the SS. If the SS properly disclaims their interest in property they would otherwise inherit, that property never becomes part of the SS’s estate, protecting it from creditors or adverse judgments. The disclaimed property is transferred to the Disclaimer Trust, which is irrevocable, and is then administered according to the terms of the Disclaimer Trust.
Other benefits to using disclaimer trusts include protecting the assets if the SS were to file bankruptcy or remarry down the line. Like the example above, this is because of the irrevocability of the trust and because the assets are not part of the SS’s estate.
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