Many citizens looks to attorneys as the first place to go to in order to manage their estates, but CPAs and financial planners should emphasize to their clients how they can play a critical role in helping draft a will or trust. Remind them that it is not enough to have a legally sound will. Your clients want a will or trust that will ensure that their loved ones are taken care of when they pass away.
Naturally, one of the biggest reasons why clients will look to a CPA to help with their postmortem financial planning is to lower the estate tax as much as possible. However, this presents challenges even for CPAs. As estate tax laws are constantly changing both at the state and federal level, a will which may work one year under one law may have to be changed to adjust for new laws. There is always the threat that a client may pass away before those changes can be made, leaving their descendants to take a larger than expected tax hit.
A more flexible approach is for the client to create a disclaimer trust. As LexisNexis notes, a disclaimer trust is a trust where “assets are held in a trust which, at the death of the first spouse to die the Surviving Spouse can revoke and amend.” In plain language, this means that the spouse can choose to disclaim, or give up property owned by the spouse. The property will be then passed on the next beneficiary or can be put in a disclaimer trust.
So for example, Mr. Brown owns an apartment building which will be passed to Mrs. Brown in the event of his death. But when Mr. Brown dies, Mrs. Brown determines with the help of a financial planner that it will be too difficult to pay the estate taxes as a result of inheriting the building. So Mrs. Brown chooses to disclaim the property, at which point it can either pass to their children or go into a disclaimer trust. Who it passes on to is the decision of Mr. Brown before he passed on, and Mrs. Brown cannot determine who should receive the property.
Traps and Pitfalls
However, trust disclaimers are not risk free and you need to inform clients of the pitfalls which they can fall into as a result. The first thing to note is that there are five requirements for a disclaimer to be fully binding. These five legal requirements basically dictate that the disclaimer must be put forward in writing nine months after the person who drafted the will dies and that the disclaimer is unqualified and irrevocable.
This does mean that the person drafting the will is counting on their beneficiaries to make sound financial decisions in the months after losing a loved one. And there are other caveats as well. If the beneficiary draws any benefit, whether by selling property or accruing interest, he cannot disclaim the asset. Similarly, if the beneficiary disclaims the asset, he cannot hope to undo it and accrue any benefits from it at a later point. If Mrs. Brown disclaims the apartment building, but then suddenly receives some terrible financial news afterwards, she cannot undo her decision to disclaim even though she might suddenly really need that income.
Allen Barron also brings up another problem with disclaimer trusts by noting a “blended family” scenario which can result through divorce and remarriage. If the family infighting which can often happen as a result of wills is problematic enough, it can become even more so when there is a spouse or trusted beneficiary who may be pressured by other family members to disclaim assets.
These problems do not mean that trust disclaimers should not be used. As noted above, a trust disclaimer offer beneficiaries more choices and flexibility compared to a normal will and can ensure they keep more of their money.
But with more choices comes more risk as a result of making bad decisions. A trust disclaimer thus requires more advice and supervision from professionals who can help aggrieved individuals make sober and rational decisions which will let them keep the most money and avoid paying more taxes.
This is where accountants and financial planners can help in a bigger role compared to attorneys, thanks to solid record-keeping and fundamental knowledge of tax laws and structure and solid job training. Remind clients that anyone with a family or loved ones should draft a will so that the client can ensure they are protected, and talk to them about whether a trust disclaimer is right for them. If your client believes in giving their beneficiaries the greatest flexibility and choices and trusts you to help said beneficiaries after the client passes on, tell them to draft a disclaimer provision.