I've written on this blog previously about the huge benefits of disclaimer bypass trusts (also called credit shelter trusts, A-B trusts, or nonmarital trusts). You can read all about that topic by clicking here.
In this post, I want to address a common mistake many people make that can "undo" all of the tax benefits of bypass trust planning. If you remember from the prior post linked above, bypass trusts work because a surviving spouse has nine months from the date of the first spouse's death to divert up to $675,000 into a bypass trust. The diverted money will be free of estate tax when the second spouse dies. When a surviving spouse diverts assets into a bypass trust, it is called "disclaiming".
The key to this sort of planning is that there must be assets available for the surviving to "disclaim". One major type of property that usually isn't available for disclaiming is bank and brokerage accounts held jointly. Under Treas. Reg. 25.2518-2(c)(4)(iii), such property is almost impossible to disclaim. It can only be disclaimed if the surviving spouse can trace exactly which funds in the account are attributable to her contributions, and which were attributable to her husband's contributions. This is very difficult to do in most marriages.
The alternative is to split joint bank and brokerage accounts into two roughly equal accounts, one in each spouse's name. This is a necessary step to make disclaimer bypass trust planning effective. This does not mean that every single joint account must be severed. Generally, there is no problem with spouses maintaining the checking account they use for their living expenses jointly. The key is to ensure that larger investment accounts are "split up". Failure to do so can result in insufficient assets available to be "disclaimed" into the credit shelter trust, causing a large estate tax bill.
Also note that unlike bank and brokerage accounts, real estate held jointly (or more specifically, as tenants by the entirety) doesn't pose a problem for disclaimer bypass trusts under Treas. Reg. 25.2518-2(c)(4)(i).
If you have any questions or are interested in setting up a disclaimer bypass trust, feel free to contact me.
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