There are many ways to provide for a married client’s surviving spouse after the client’s death. This type of estate planning is often referred to as marital share funding. Spouses may use various marital share funding options in either will- or trust-based estate plans. Their goals may include estate tax planning, probate avoidance (especially when using a trust-based plan), and incapacity planning. Disclaimers can be used when planning for estate taxes and may be particularly helpful in other situations relevant to married clients.
All to Surviving Spouse and Statutorily-Defined Disclaimers
Clients who prefer simple estate plans, have modest estates, or do not want built-in estate tax planning may use the “all to surviving spouse” marital share funding option. Under this approach, the deceased spouse’s property is not divided into marital and nonmarital shares. Instead, upon the death of the first spouse, the trustee of the trust or personal representative of the estate (the fiduciary) will be directed to distribute all of the deceased spouse’s property outright to, or in a trust for the benefit of, the surviving spouse. Assuming the surviving spouse is a US citizen, the property passes under the unlimited marital deduction, and none of the deceased spouse’s estate tax exclusion amount is used.
If the surviving spouse does not want specific assets or any assets (e.g., because the surviving spouse does not want their estate enlarged to the point that estate taxes might be due upon their death), then the surviving spouse must execute a disclaimer under applicable statutory law. This disclaimer causes the disclaimed property to be distributed to, or for the benefit of, other beneficiaries (not at the direction of the surviving spouse), and the deceased spouse’s unused estate tax exclusion amount is applied to the value of the disclaimed property. In most cases, the surviving spouse is unable to benefit from or have any control over the disclaimed property. This approach typically is easy for clients to understand and attorneys to administer, but it does not provide flexible estate tax planning.
Disclaimer Funding Method: Postmortem Estate Tax and Other Planning
The disclaimer marital share funding option provides built-in estate tax planning. Under this approach, the fiduciary allocates all of the deceased spouse’s property to the marital share, unless the surviving spouse exercises a qualified disclaimer under Internal Revenue Code (I.R.C.) § 2518. Any disclaimed property is allocated to the nonmarital share, the terms of which are already established in the estate plan. The marital share passes under the unlimited marital deduction and may be distributed outright to, or held in a trust for the benefit of, the surviving spouse. The deceased spouse’s unused estate tax exclusion amount is allocated to the value of the nonmarital share, which may be held in a bypass or credit shelter trust or distributed to the residuary beneficiaries, depending on the terms of the deceased spouse’s estate plan.
The disclaimer marital share funding method offers more flexible postmortem estate tax and spousal planning options. The surviving spouse chooses the assets that will be subject to the disclaimer, as described in the foregoing section; however, when using the drafted disclaimer option, the surviving spouse may still retain an interest in and be able to benefit from the disclaimed assets. Depending on the nature and value of the deceased spouse’s property, the surviving spouse’s support needs, and other available assets, the spouse may access the disclaimed assets under a bypass or credit shelter trust. Otherwise, the spouse may disclaim their interest in the assets through both the marital and nonmarital share, therefore sending the disclaimed assets directly to the residuary beneficiaries. Though the surviving spouse may not direct how the disclaimed assets pass, the deceased spouse’s estate plan may offer more options regarding the potential terms of the surviving spouse’s disclaimer.
This approach comes with certain cautions: the surviving spouse may not hold a limited or general power of appointment over disclaimed assets funded into a bypass or credit shelter trust. In addition, a qualified disclaimer must meet specific federal and state law requirements and has a strict deadline. For these reasons, it is important to have an experienced estate planning attorney assist with the preparation of the estate planning documents, the execution of the disclaimer, and the funding of the marital and nonmarital shares.
The Clayton Election: Postmortem Estate Tax and Other Planning with No Disclaimer
The Clayton election provides flexible postmortem estate tax planning similar to the disclaimer option but operates differently—and without the use of a disclaimer. Under this approach, the fiduciary allocates all of the deceased spouse’s property to the nonmarital share (or bypass trust); however, any property listed on Schedule M of the deceased spouse’s federal estate tax return (Form 706) is subject to a qualified terminable interest property (QTIP) election and thus allocated to the marital share. Accordingly, more time is allowed for deciding to create and fund the marital share, and the surviving spouse may retain a limited power of appointment over the marital share funded with assets allocated as a result of the QTIP election.
In general, an independent fiduciary should make the QTIP election to avoid potential adverse or unintended gift tax and breach of fiduciary duty implications (an interested fiduciary may be deemed to have made a gift of property that is not subject to the QTIP election and may breach the fiduciary duty to act impartially with respect to trust beneficiaries). Accordingly, the deceased spouse’s estate plan should either appoint or designate a method of appointing an independent fiduciary for this purpose. Because of the Clayton election’s special drafting considerations and the need to prepare and file a Form 706, an experienced estate planning attorney should be involved in both the drafting and administration processes.
The types of marital share funding options discussed generally offer postmortem planning, though the degree of flexibility and means of effecting the postmortem plan differ with each option. Whether the strategy uses a disclaimer or a special election on a tax form, they all require action after the death of the spouse—when the surviving spouse and other family members may be grieving and emotional—to make use of the deceased spouse’s unused estate tax exclusion amount.
Regardless of the approach, WealthCounsel can support attorneys in planning for their clients with comprehensive education and resources ranging from foundational to advanced estate planning, superior document drafting software with Wealth Docx®, a streamlined solution for postdeath trust administration with Wealth Tracx®, and an active and collaborative community of thousands of estate planning attorneys