The use of disclaimers for flexibility in planning for qualified retirement assets.

• Author: Jablow, Benjamin A.

Estate planning for the use of qualified retirement assets poses many problems and, therefore, requires flexible planning for the surviving spouse.

Estate planning attorneys prepare wills and trust agreements for the purpose of minimizing federal estate tax. The most common plan for a married couple involves the preparation of a credit shelter trust and marital deduction trust for both husband and wife. This is commonly known as an AB plan. The AB plan allows the couple to presently use two unified credits[1] and shelter up to $1,300,000 following the death of the second to die.

Once the plan is prepared, the attorney will then work with the couple to fund their estate plans. This process requires the clients to retitle their assets and redesignate their insurance policies and qualified retirement assets.[2] In most situations, the couple will need to determine the primary and contingent beneficiaries of their qualified retirement assets. The couple's nonqualified retirement assets[3] will determine the importance of the beneficial designation for the qualified retirement assets. If the couple has nonqualified retirement assets that exceed twice the unified credit, then the beneficial designation is less important. If the couple does not have nonqualified retirement assets that exceed twice the unified credit, then the beneficial designation is more important.

This article will discuss the prototype estate plan for couples that have assets that exceed one unified credit which include qualified retirement assets. The article will then discuss the estate tax and income tax issues as they apply to the qualified retirement assets. The article finally will propose the best method to designate the beneficiaries of the qualified retirement assets in order to maximize both income tax and estate tax planning.

Disclaimer

A disclaimer is a tool used by estate planning attorneys to redirect property at the death of an individual. The person who makes the disclaimer must make it within nine months of the death[4] of the decedent in order to be a qualified disclaimer for federal estate tax purposes. In addition, the individual who disclaims the property cannot receive any benefits from the property prior to making the disclaimer. If the disclaimer is properly made, then the individual who made the disclaimer will be deemed to have predeceased the decedent and the property will go to the next beneficiary.

The use of a disclaimer for estate planning needs to be properly planned so that the surviving spouse will choose to execute the plan including the use of the disclaimer. In the context of qualified retirement assets, disclaimers typically are used to maximize an AB estate plan. The following case example demonstrates the planning for the use of a disclaimer.

Case Example

Jim and Sally Smith meet with you to discuss estate planning. Jim is 55 years old and is currently working. Sally is 53 years old and is currently working. The Smiths have three children ages 18, 23, and 25. They own a house with a fair market value of $300,000 and no mortgage. They have a stock portfolio of $350,000 and joint bank accounts of $200,000. Jim's 401k is worth $750,000 and Sally's 403b is worth $450,000. The Smiths do not own any life insurance and they are uninsurable due to their health. They wish to leave their estate equally to their three children, utilize revocable trusts in their planning, and shelter the maximum amount from federal estate tax.

The estate planning attorney prepares an AB estate plan based upon their needs and prepares revocable living trusts, wills, and durable powers of attorney[5] for both Jim and Sally. The terms of the revocable living trust provide for a credit shelter trust and a marital deduction trust. In connection with executing the Smiths' estate plan, the estate planning attorney needs to discuss the funding of the plan. In that discussion, the attorney advises the Smiths that the house should remain titled as tenants by the entireties for homestead purposes. The stock portfolio and bank accounts should be divided such that one-half will be titled in Jim's trust and one-half titled in Sally's trust.

The discussion then turns to the 401k and 403b plan. The Smiths ask who should be the primary and contingent beneficiaries for the plans. In addition, they are concerned with the estate and income tax issues.

Funding the Smiths' AB Plan and Estate Tax Issues

The Smiths' assets present a problem for most estate planning attorneys. Their assets would typically be divided as follows:

Jim's 401K $750,000 Sally's 403b $450,000 Primary Beneficiary Sally Primary Beneficiary Jim...