Ownership, Beneficiaries and Disclaimers in Estate Planning

October 20, 2010
pie chart1 e1288969773372 150x132 Ownership, Beneficiaries and Disclaimers in Estate Planning

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Today, we will again discuss how drafting wills and trusts are sometimes only part of the recommended strategy towards avoiding estate taxes.  Close inspection of your asset ownership, the naming of beneficiaries, and proper drafting of your estate documents are essential towards a complete estate plan.

We discussed the mechanics of the A-B Trust plan in this recent post, which is used to limit or potentially eliminate your estate tax liability.  We have also previously posted about ownership and titling assets here.

Here, we combine these two themes by presenting a somewhat typical scenario with unanticipated consequences, along with two potential solutions.

Asset Ownership Scenario

Let’s say that two spouses, A & B, own the following:

  • A owns a $500,000 life insurance policy, naming B as beneficiary
  • B owns a $500,000 life insurance policy, naming A as beneficiary
  • A stands to inherit $125,000 from A’s parents
  • B stands to inherit $125,000 from B’s parents
  • A’s retirement plan has $250,000 and names B as primary beneficiary
  • B’s retirement plan has $250,000 and names A as primary beneficiary
  • A & B jointly own a $250,000 home outright with survivorship rights

The couple’s total assets would be $2 million after the surviving spouse passed away.

Without an estate plan, this estate would be charged nearly $350,000 in federal estate taxes.  Our goal is to reduce this amount to $0.

Overuse of the Marital Deduction

But wait. Our A-B Trust plan does not fully resolve all of our problems.  This is because after the first death, any property that goes directly to the surviving spouse is a use of the marital deduction.

To illustrate, let’s continue our scenario above.  When Spouse A dies first, Spouse B receives the proceeds from Spouse A’s life insurance policy ($500,000) directly.  Assuming Spouse B is named the beneficiary of the retirement plan, B will receive this ($250,000) directly as well.  Since the house is owned jointly with survivorship, B will also receive it (including A’s $125,000 share) outright.

Therefore, $875,000 of assets will transfer directly to Spouse B and thereby makes use the marital deduction.  Assuming A’s parents predecease A, only Spouse A’s $125,000 inheritance will be eligible for the Credit Shelter Trust, as it is the only asset subject to the provisions of his will or trust.

At Spouse B’s death, B will be able to use the $1 million estate tax exemption since all assets will go to the children (and not be eligible for a marital deduction).  However, the children will still owe about $300,000 of federal estate tax at this time because the $1 million exemptions for both Spouses A & B were not fully utilized.

Two Solutions

1.  Changing Beneficiary Designations

One recommended solution would be to name the trusts as the beneficiaries of your insurance policies and retirement plans.  While it may seem counter-intuitive not to name your spouse or children as beneficiaries, the trusts would be set up to benefit them through income distributions and the estate tax savings.

2.  Disclaimers

Another solution would be including a “disclaimer” provision in the will or trust, which allows the beneficiary the ability to refuse a bequest.  This will increase the flexibility of the will or trust, especially when aspects about the future are uncertain, such as any new estate tax exemption and rate by the beginning of 2011.

From our scenario above, say the survivor chose to disclaim her rights to the decedent spouse’s life insurance policy.  If the decedent’s will included a provision directing all disclaimed property to go into his credit shelter trust, we would reach our goal of $0 in federal estate taxes.

Yet another example of how drafting a will or trust may not be enough for your estate.

 Ownership, Beneficiaries and Disclaimers in Estate Planning
 Ownership, Beneficiaries and Disclaimers in Estate Planning


Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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2 Responses to Ownership, Beneficiaries and Disclaimers in Estate Planning

  1. October 20, 2010 at 11:01 pm

    Do you think Congress will act on the estate tax before Jan. 1? Probably depends on the outcome of the mid-term elections, right?
    Jack Whittington recently posted..Dear Legal Community- Enough With the Cynicism

    • Scott
      October 21, 2010 at 1:19 pm

      Mr. Whittington–

      I have been telling my clients just that. Since the income tax is also tied to EGTRRA, I don’t see how any of the incumbents in Congress would risk taking a stand on this before election.

      I’m in the minority in that I believe that Congress will act on the estate tax before January 1 because too many folks would be affected by reverting back to 2001 rates, especially during the “Great Recession”.

      Thank you for the comment, sir.


      Mr. Whittington is the author of the World Wide Whit blog. He is a fascinating voice for Generation Y and a third-year law student at the University of Tulsa.

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