What Is a Disclaimer Trust?

A disclaimer trust is a type of trust that contains embedded provisions, usually included in a will, allowing a surviving spouse to put specific assets under the trust by disclaiming ownership of a portion of the estate. Disclaimed property interests are then transferred to the trust, without being taxed.

Key Takeaways

  • A disclaimer trust is a clause typically included in a person's will that establishes a trust upon their death, subject to certain specifications.
  • This allows certain assets to be moved into the trust by the surviving spouse without being subject to taxation.
  • Additionally, the provision can allow for trust distributions to be paid to survivors, such as minor children.

How Disclaimer Trusts Work

If an individual passes away and leaves their estate to a spouse, the spouse may disclaim some interests in the estate, which then pass directly to the trust as though it were the original beneficiary.

Provisions can be written into the trust that provide for regular payouts from the trust to support survivors. For example, a trust can provide for surviving minor children as long as the surviving spouse elects to disclaim inherited assets, passing them on to the trust.

Disclaimer trusts require that the survivor act according to the wishes of the deceased, and disclaim ownership of some of the assets that the deceased has bequeathed. In the above example, if the surviving spouse does not disclaim ownership of any portion of the estate, then the deceased's wish to transfer assets to the surviving minor children goes unfulfilled.

A surviving spouse or the specified inheritors of an estate have a legal time period, generally up to nine months from the date of death, to establish a trust for the disclaimed assets. If they fail to do so, then all the assets contained in a will are taxed.

Because of the legal complexities involved, these trusts should only be set up by qualified professionals.

Disclaimer Trust vs. See-Through Trust

Another example of a trust that enables assets to move through to additional beneficiaries is a see-through trust.

A see-through trust, or pass-through trust, permits individuals to pass retirement assets from their individual retirement accounts (IRAs), via a trust, to their elected beneficiaries. See-through trusts use the life expectancies of the beneficiaries to determine the required minimum distributions (RMDs) that will occur after the death of the retirement account holder. IRA owners are able to choose their beneficiary, and federal laws prohibit accounts from continuing on indefinitely.

Disclaimer Trust and Inheritance

Disclaimer trusts, along with other trusts, can bring up challenges with regard to inheritance. These are usually set out clearly in a grantor’s will; however, if a will is not finalized at the time of death, determining rightful heirs proves much more complicated.

In most countries, inheritances are taxable. An inheritance tax is generally distinct from an estate tax: An inheritance tax would aim to tax the heir who has received the inheritance, while an estate tax would apply to the assets of the deceased's estate.