Disclaimer Wills
Although we are now in 2010, and the Estate tax has been
eliminated on the Federal level for this year only, it is expected to come back
with a vengeance next year. Furthermore,
New York State still has an Estate tax which may affect the Estate. Therefore, in this article I am setting forth
some concepts of Estate planning which worked in 2009 and should continue to be
effective throughout 2011. It is likely
that the Estate tax-Gift tax foundation will remain the same as was in 2009, with
only changes to threshold levels at which tax will be imposed in 2011.
If you are married and have a potentially taxable Estate,
i.e. gross assets, including life insurance not held in a trust, which exceed
in value $1,000,000.00 (N.Y.) or $3,500,000 (Federal), then you should have a
“Disclaimer” Will to save on estate taxes.
The disclaimer will enables each spouse to fully utilize the unified
credit available to the estate of each spouse to shelter up to $7,000.000.00 in
assets from death tax. To explain, see
the following example.
Let’s say your estate is $7,000,000.00 and you own
everything jointly with your spouse.
Let’s further assume that your spouse has provided the consideration to
acquire one-half of the assets and will acquire the other one-half of the
assets upon your death under a survivorship interest. If you died in New York in 2009, your estate
would have no death tax payable on either the New York or Federal level. This is because your Estate could claim an
unlimited marital deduction to offset any property passing to the surviving
spouse. The same marital deduction would
apply to all assets in your own name left to your spouse in a simple “I love
you” will.
But now look at the surviving spouse’s estate tax
situation. If she were to also have died
later in 2009, then she would have had a $7,000,000 estate passing to children
or more remote descendants and no marital deduction to offset any tax. Her estate would have had the benefit of a tax
credit allowed by law (called the “unified credit”) which shelters assets
totaling $1,000,000.00 in New York and $3,500,000.00 on the Federal return. Nevertheless, the remaining taxable assets
incurred a marginal rate of approximately 12.8% at the state level and 45% at
the federal level. The actual tax due to
the New York and Federal governments, excluding any deduction for funeral
expenses, was be $638,000.00 and $1,287,900.00 respectively. The total tax was $1,925,900.00. Almost two million dollars out of your combined
estates would have been taken for taxes.
That’s two million out of seven million, or twenty-nine (29%) of your
wealth, for taxes.
The problem here is that you were unable to utilize the
unified credit in the estate of the first spouse to die. The marital deduction was nice, it offset all
the tax, but then it was unavailable in the surviving spouse’s estate because
there is no surviving spouse of the second spouse to die. Since the maximum unified credit is $3.5
million, but the whole estate of $7.0 million is in the second to die spouse’s
estate subject to tax, then there was a tax assessed on the remaining $3.5
million in the second estate. You would
have been better off not using the marital deduction in the first estate, but
instead, passing $3.5 million of those “deductible” assets to the surviving
spouse in a manner which allowed your estate to claim the full unified credit
and which would keep ownership of those assets in the first estate, all the
while giving the surviving spouse the benefits of the income from and principal
of those same assets as a trust beneficiary.
One might argue that tax can be avoided by simply making
sure that the assets in each spouse’s taxable estate do not exceed $3.5
million. Why do you need a trust, when you can just divide up the ownership of
the assets to keep each spouse’s interest under $3.5 million? This is not the final solution, however,
because assets left to the surviving spouse via the deceased spouse’s will are added
to the survivor’s estate then, and if still owned by the survivor at the time
of her death, result in her taxable estate being 7.0 million dollars! Thus, you still have $2 million dollars of
Estate tax payable from estate of the second spouse to die.
To accomplish this goal of avoiding estate tax completely on
the $7.0 million in assets we recommend a disclaimer provision in the will of each
spouse which allows the survivor to make a post-mortem decision to forego
taking title to certain assets from the estate of the deceased spouse. Under current law, disclaimed assets pass to
other residuary beneficiaries named in the will, or to intestate distributees,
however, the testator can anticipate the post-mortem disclaimer and provide in
the will a contingency that requires that disclaimed assets instead be focused
into a trust for the benefit of the surviving spouse. This trust in the estate
of the first spouse to die would allow the surviving spouse all of the income
from the trust and discretionary distributions from the trustee for her health,
maintenance and educational expenses. In
essence, the surviving spouse has all of the benefits of outright ownership,
except the ability to control the final disposition of the assets. The children are the named beneficiaries to
receive upon the death of the surviving spouse.
In this way a trust of about $3.5 million dollars can be set up in the
first spouse’s estate which does not qualify for the marital deduction but does
qualify for the unified credit, benefits the surviving spouse, and, because the
sums in the trust are below the minimum threshold for federal estate tax,
incurs no estate tax in the estate of the first spouse to die. This fund of
assets will never enter the surviving spouses’ estate, instead bypassing her
estate and going directly to the children upon her death. This is also commonly known as a bypass trust
for this reason.
The remaining $3.5 million dollars would be accepted from
the first spouse’s estate or already be owned by the surviving spouse as her
half of jointly owned property. That
money would be subject to tax in the second spouse’s estate; however, the
second unified credit would shelter it from tax since it is below the threshold
for tax.
Since New York taxes estates at $1,000,000.00 then some tax
would be payable to New York on amounts between $1.0 million and 3.5 million in
both estates. The tax rate is much lower
than the federal rate for estate tax. (NY-6.4% at $1.0 M, vs. Fed 55% at $3.5M
to $7.0M). The most tax that would have
to be paid to the New York State Tax department on two $3.5 million dollar
estates would be $229,200.00 on each estate or a total of $458,400.00. One would find that the tax paid to New York
on both estates is much less than cost of paying Federal and New York estate
tax in estate of the second spouse to die, $458,400.00 versus $1,925,900. Thus, the disclaimer trust will saves 1.46
million dollars versus a simple will.
This is money going to your children as opposed to Uncle Sam.
This is further shown by examining the unified credit itself. The maximum unified credit under the federal
system is $1,455,000.00, sheltering $3.5 million of assets. Since the unified credit is a dollar for
dollar tax reduction then in theory you should save $1.45 million dollars in
tax by having two of such credits in two taxable estates totaling 7.0 million
dollars of assets, as opposed to one taxable estate of the surviving spouse
with $7.0 million of assets but only one credit sheltering half the assets. The
numbers work out, as the tax differential is $1,466,000.00 in the two
hypothetical estates mentioned above.
Presently, in 2010, the federal estate tax has been
temporarily shelved. The tax comes back
in 2011 at year 2001 levels, ( Unified Credit of $345,000.00 sheltering
$1,000,000.00 from federal tax ). It is
unlikely that Congress will either eliminate the tax or impose tax at such a
low level as originally intended for 2011.
It is likely that whatever amount of minimum threshold is chosen for the
tax, it will “catch” a lot of middle class taxpayers’ estates unless some
advance planning is done to utilize the unified credit in each estate.
The unified credit disclaimer trust in husband-wife
reciprocal wills can save millions and should be standard planning for couples
with asset portfolios of this size. Ask
for our disclaimer trust will when you call us for your estate planning needs.