A common estate plan structure for larger estates is that a married person will include a “disclaimer credit shelter trust” in his or her Last Will and Testament, for the benefit of the surviving spouse. The concept behind this kind of trust is that the surviving spouse will have their own assets, as well as certain assets such as tax-deferred accounts that were owned by the late spouse which named the survivor as the beneficiary, and can “disclaim” or give up the right to receive other assets that come to them as a result of the death of their spouse. Some examples of disclaimable assets would be half of jointly-held accounts, life insurance proceeds, or assets that were solely-owned by the deceased spouse and are passing under the Will to the surviving spouse. The New Jersey law is at N.J.S.A. 3B:9-1 et seq.
By disclaiming, a substantial amount of assets can go back to the estate and from there, be distributed to a Disclaimer Credit Shelter Trust for the surviving spouse’s benefit. This is because when a person files a disclaimer, it is as if the person predeceased, For what we’re talking about, the Will would direct them into the disclaimer credit shelter trust. Down the road, when the surviving spouse dies, the assets in the Trust will go to whoever is named as the remainder beneficiaries — often it’s the children — and will “bypass” the estate of the second spouse to die. There may even be substantial growth in the value of that portfolio between the deaths of the first and second spouses. This means that the value of the second spouse’s estate will not include all the assets that were placed in the trust. The trust gets its own taxpayer EIN number from the IRS, and is managed by a trustee or co-trustees. Sometimes the surviving spouse is a co-trustee. The idea is for this to serve as the rainy day fund, as it will be there if the surviving spouse outlives their other assets.
What I have seen over many years is that when the first spouse dies, there is a tendency on the part of surviving spouses (and sometimes, their financial advisors) to want to quickly shift the joint assets into the name of the surviving spouse alone. This can be done when no estate tax is due. But it will interfere with the ability to disclaim assets. And that can ruin the deceased person’s a beautifully-written estate plan
Assets must be disclaimed BEFORE the heir or surviving co-owner takes custody and control over the asset. Once the asset has been shifted into the survivor’s sole name and control, it can’t be disclaimed. Now, if there are enough other assets to fill up the amount you want to disclaim (often $675,000, which is the New Jersey estate tax threshold), you can disclaim other assets. But if there aren’t enough other assets … then you have lost this opportunity.
The moral of this story for surviving spouses is: slow down. Consult with your CPA and estate planning attorney and evaluate your options under the Will. Make a plan. After that, you can begin the process of taking or disclaiming, following the required procedures.
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