Articles

Article I "Estate Planning During Times of Uncertainty and the Use of Disclaimers"

Individuals and couples should review their Wills and estate plans. The expiration on December 31, 2010, of the Economic Growth and Tax Relief Reconciliation Act of 2001, the refusal of New York State to conform to Federal Estate and Gift tax laws and the recession bring uncertainty to the area of estate planning and are reasons why clients should review their Wills and estate plans. The use of disclaimers, which will be discussed hereafter, is an estate planning technique that provides flexibility in this era of uncertainty.

Economic Growth and Tax Relief Reconciliation Act of 2001

provided for the increase of the unified credit equivalent amount to $1,000,000.00 in 2002, to $1,500,000.00 in 2004, to $2,000,000.00 in 2006, and to $3,500,000.00 in 2009. The 2001 Act repeals the entire estate tax for 2010. However, Economic Growth and Tax Relief Reconciliation Act of 2001, which reduced income taxes as well as estate taxes, contains a “sunset” provision that in 2011 reinstates the Federal estate tax law to its former 2001 rates and the unified credit equivalent amount to $1,000,000.00.

The pundits have predicted since enactment of the 2001 Act that Congress would change the estate and gift tax laws way before the sunset of the 2001 Act. They continue to be wrong. The same pundits now predict that the unified credit equivalent will be changed to $3,000,000.00 per individual or $6,000,000.00 per couple. In light of past inaction by Congress, it remains difficult to predict what Congress will do in the future.

New York did not conform to the Federal unified credit equivalent when the 2001 Act was passed. The New York State unified credit equivalent has remained at $1,000,000.00 for the entire period. Considering New York State’s revenue needs and its failure to conform to Federal changes in the past, New York may not conform to future Federal changes to the estate tax law. This presents a problem. If the Federal Government enacts a $3,000,000.00 unified credit equivalent but New York State retains its $1,000,000.00 unified credit equivalent, an estate may be subject to a New York Estate tax but not a Federal estate tax.

Under Federal law each spouse is entitled to a unified credit against estate taxes. However, when a couple make reciprocal Wills leaving all assets outright to each other, the unified credit of the first spouse to die is wasted and the amount subject to estate taxes upon the second spouse’s demise is maximized. In order to minimize estate taxes by taking advantage of both spouse’s unified credit, each spouse needs to create a unified credit by-pass trust in his or her Will. The assets of the unified credit trust, including any appreciation thereof, will not be included in the second spouse’s estate, thereby substantially reducing the value of the second spouse’s estate and the estate tax, if any, on the surviving spouse’s estate. The first spouse to die can insure utilization of his or her unified credit by either (i) creating in the first instance a unified credit by-pass trust in his will or (ii) by providing in his Will an outright bequest to the surviving spouse and that if the surviving spouse disclaims all or part of the outright bequest, the assets are left in trust for the surviving spouse’s benefit.

Due to the uncertainty in the Federal estate tax law, the failure of New York State to conform to Federal estate tax law and significant change in asset value due to the current recession, many people who have unified credit trusts in their Wills, may or may not need them in the future. Therefore, the preferable way in dealing with this uncertainty is building flexibility into your Wills. This can be achieved by the use of the disclaimer technique. Under both Federal and State law, a beneficiary under a Will has nine (9) months after death to disclaim either all or part of a bequest. A Will may provide that if the surviving spouse disclaims all or part of an outright bequest, a trust is then created for the surviving spouse’s benefit for his or her lifetime. The amount disclaimed will depend on the then applicable Federal and New York State unified credits. Of course, there will be times when the surviving spouse may elect to create the trust for non-taxable reasons. For example, the surviving spouse may want his or her assets to be held in trust to shelter them from a second marriage.

Despite the attractive elements of the disclaimer technique, it may not best serve the needs of all couples. An individual may prefer to create a trust in the first instance rather than giving the surviving spouse a choice for the foregoing reasons:

A. The decedent prefers his children to receive an amount equal to the unified credit outright rather than upon the spouse’s demise.

B. If the event of remarriage of the surviving spouse, the decedent wants to insure that his assets go to his children upon the death of the surviving spouse.

C. The decedent does not have confidence that the surviving spouse will exercise the disclaimer in the event it is necessary to save estate taxes.

D. The surviving spouse is incapable of managing the decedent’s assets for anyone of numerous reasons.

The purpose of this website is to familiarize its readers with the subject matter. The author is not rendering legal, accounting or other professional advice or opinions on specific facts and assumes no liability with the use of this information. The law is very complex and constantly changing. No one should attempt to apply or interpret any law without the help of a trained expert. The author is licensed to practice law only in New York State and any law referred to on this site is the law as it applies in the State of New York.