Disclaimer Trusts

Revocation Power Of Attorney - Disclaimer Trusts

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While there is a gift lapse in the estate and generation-skipping replacement taxes, it's likely that Congress will reinstate both taxes (perhaps even retroactively) some time during 2010. If not, on January 1, 2011, the estate tax exemption (which was .5 million in 2009) becomes million, and the top estate tax rate (which was 45% in 2009) becomes 55%. Assuming the federal estate tax (Fet) exemption is reinstated at .5 million or more, then for most population the Fet has been repealed. Agreeing to the Tax course Center, only five of every 100,000 population who die have estates over .5 million.

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Revocation Power Of Attorney

For married couples with dutible estates, the base planning tool is for each spouse to found a revocable living trust. Upon the death of the first spouse, an estimate equal to his/her Fet exemption is allocated to a reputation shelter Trust (Cst). Other terms for the reputation shelter Trust are Bypass Trust, family Trust and Residuary Trust. A Cst allows the surviving spouse broad entrance to the assets in the Cst without the assets being included in the spouse's estate. Thus, the Cst allows each spouse to leave his/her Fet exemption to their children. Without a Cst, the first spouse to die "wastes" his/her estate tax exemption.

The provisions that the spouse can enjoy from the Cst during his/her lifetime (without causing the assets in the Cst to be dutible in the surviving spouse's estate) are:
The spouse can have all of the revenue of the Cst. Treas. Reg. Sec. 25.2518-2(e)(5), Example 4. Alternatively, the trustee can "sprinkle" the revenue of the Cst to children and grandchildren so as to shift that revenue to lower tax brackets, or can collect the revenue and add it to principal. The spouse can receive necessary distributions from the Cst (see Paragraphs 5 and 6 below). The spouse can have the power to withdraw the greater of ,000 or 5% of the necessary of the Cst each year. Irc Section 2041(b)(2). The spouse can have a testamentary diminutive power of appointment (Lpa) over the assets in the Cst. An Lpa allows the spouse to "rewrite" the dispositive provisions of the Cst. However, the Lpa is normally drafted so that the Lpa can only be exercised in favor of the grantor's descendants and/or charities. The Lpa cannot be exercised in favor of the spouse, his/her creditors, his/her estate, or the creditors of his/her estate. Irc Section 2041(b)(1). The spouse can be the sole trustee of the Cst, in case,granted that distributions to the spouse are diminutive to an "ascertainable standard" (i.e., health, education, maintenance and support). Irc Section 2041(b)(1)(A). Distributions to the spouse in excess of the ascertainable appropriate can be made from the Cst if an independent co-trustee is named to serve with the spouse, but discretion on distributions to the spouse must be diminutive solely to the independent co-trustee. The spouse can have the power to take off the co-trustee and appoint an personel or corporate successor co-trustee that is not related or subordinate to the spouse (within the meaning of Irc Section 672(c)). Rev. Rul. 95-58. The deceased spouse's estate, over and above the estimate allocated to the Cst, will pass estate tax free to the Marital Trust because of the unlimited marital deduction. When the surviving spouse dies, the assets in the Marital Trust (along with the assets in the spouse's Living Trust) will be subject to estate taxes, but only after subtracting the surviving spouse's Fet exemption.

The two most base types of Marital Trusts are the general Power of Appointment (Gpa) Trust and the remarkable Terminable Interest asset (Qtip) Trust. Both types of Marital Trusts must supply the surviving spouse with all of the revenue and may (but need not) supply the spouse with principal. The typical Gpa Marital Trust allows the spouse to resolve the greatest beneficiaries of the Marital Trust upon his/her death, and normally allows the spouse to withdraw the necessary of the Marital Trust during his/her lifetime without restriction. The Qtip Marital Trust, on the other hand, does not allow the spouse to resolve the greatest beneficiaries and normally restricts the spouse to necessary as needed for health, education, maintenance and support. But, to add flexibility to a Qtip Marital Trust, the spouse may be given a ,000/5% yearly withdrawal power and/or a diminutive power of appointment over the Qtip Trust.

A Cst has the following advantages: It utilizes both spouses' Fet exemptions, while giving the surviving spouse entrance to and control over the assets in the Cst; it preserves assets for the couple's descendants (in case the spouse remarries); and it protects the spouse and descendants from creditors.

But, there are disadvantages to a Cst as well. The surviving spouse's entrance to the assets in the Cst, albeit broad, is (as noted above) restricted. Moreover, if the spouse withdraws more from the Cst than permitted, he/she may be accountable to the greatest beneficiaries of the Cst (i.e., children and grandchildren). The Cst also adds complexity to the spouse's life in that isolate records for the Cst must be maintained and yearly revenue tax returns (Form 1041) must be filed for the remainder of the spouse's lifetime. And, if a co-trustee over the Cst is used, the spouse will have to cooperate with that trustee.

For many couples with non-taxable estates, particularly those with children all from the same marriage, the disadvantages of a Cst outweigh the advantages. Therefore, they would prefer to naturally leave their estate to a Gpa Marital Trust for the surviving spouse. But, if their estates were to growth and/or the Fet exemption was reduced by future legislation, they still want the potential to use both spouses' Fet exemptions. It is inherent to accomplish both objectives with a Disclaimer Trust.

Disclaimer Trusts became beloved after the 2001 Tax Act was passed because of the increasing Fet exemption and the uncertainty created by the Act. With a Disclaimer Trust, a married couple's revocable living trusts leave the deceased spouse's whole estate to a Gpa Marital Trust. The Cst is then funded only if the surviving spouse disclaims (refuses) part of the deceased spouse's estate. This enables the spouse to resolve how much to keep outright (to be taxed at the second death) and the estimate to be allocated to the Cst (where it is shielded from estate tax at the second death). In production an informed decision to disclaim and how much to disclaim, one must discover the size of the combined estate, the spouse's age and health (which impacts the spouse's needs for funds), whether minor children will be beneficiaries of the Cst, the inherent appreciation of the assets not disclaimed, and the status of the Fet exemption.

For example, assume a married combine has combined assets of .5 million, which are evenly divided between their revocable living trusts. Each trust provides that 100% of the trust asset is allocated to a Gpa Marital Trust upon the death of the grantor-spouse. But, if the surviving spouse disclaims all or a part of the decedent's estate, the disclaimed part passes to a Cst. If, at the time of the first death, both husband and wife are in their seventies or eighties and the Fet exemption is .5 million, it might make sense for the spouse to disclaim million of the deceased spouse's .25 million estate. This will leave the spouse with a .5 million dutible estate (i.e., .25 million in the spouse's living trust and .25 million in the Gpa Marital Trust), which will be thoroughly sheltered from estate taxes by the spouse's Fet exemption.

But, if at the first death the surviving spouse is only in his/her forties or early fifties, the decision might be to forgo the disclaimer. The younger the spouse, the more likely the estate will not increase, but instead be consumed and decline in value. This would be particularly true if there are young children involved. Moreover, the spouse will have ample time to gift a part of the combined estate to children and grandchildren (using his/her ,000 yearly gift tax exclusion) so that there may be no estate tax due upon the death of the surviving spouse.

For couples whose estates are below the estate tax exemption, a disclaimer trust still makes sense. It's inherent the estate could grow straight through appreciation, inheritances, and/or by acquiring life guarnatee on one or both spouses' lives. It's also inherent the estate tax exemption will be reduced by Congress in the future. The disclaimer trust avoids saddling the surviving spouse with the time and expenses of administering a Cst, unless funding a Cst would ensue in an estate tax savings.

In order to be a "qualified" disclaimer for Fet purposes, the disclaimer must meet the following five requirements set forth in Internal revenue Code Section 2518(b):
It must be an irrevocable and unqualified refusal to accept an interest in property; It must be in writing, signed by the spouse; It must be received by the trustee within nine (9) months of the grantor-spouse's death; The spouse must not have appropriate the disclaimed asset or any of its benefits; and As a ensue of the disclaimer, the interest must pass without any direction from the spouse. Because Irc Section 2518 prohibits the surviving spouse from retention a power to direct the habit of the disclaimed property, the spouse cannot be given a diminutive power of appointment over the Cst (unless diminutive by an ascertainable standard). See Treas. Reg. Sec. 25-2518-2(e)(2) and Treas. Reg. Sec. 25-2518-2(e)(5), Example 5. Nor can the spouse (either as a beneficiary or as the sole trustee) have any discretion over the Cst's property. But, the spouse can serve as the sole trustee of the Cst if the trust bargain contains mandatory distributions (i.e., no discretion on part of the trustee) or ascertainable standards for distributions of necessary and income. Treas. Reg. Secs. 25-2518-2(e)(2) and 25-2518-2(e)(5), Examples 11 and 12.

There are also state law requirements for production a disclaimer. Failure by the surviving spouse to satisfy all of the federal requirements set forth above will ensue in the disclaimer being treated as a dutible gift from the spouse to the remainder beneficiaries of the Cst (i.e., the children and grandchildren).

In summary, for a married combine whose combined estate may or may not exceed the Fet exemption, a disclaimer trust will supply the combine with the most degree of flexibility. But, for couples with children from a prior marriage, a disclaimer trust will not warrant that the children will receive an patrimony (as would be the case where the Cst is funded automatically with the deceased spouse's Fet exemption). Even with a first marriage, the surviving spouse could remarry and leave the estate to the new spouse with a disclaimer trust. Finally, care must be taken immediately after the first spouse's death (when the spouse may be unable to cope with production financial decisions) to protect the remarkable disclaimer. Thus, the flexibility found is disclaimer trusts may not be right for every combine and, therefore, the combine should consult with an experienced estate planning attorney.

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