Planning Flexible estate planning: Disclaimer trusts and the Clayton QTIP election. By Scott Garrison, JD

An important tenet of estate planning is that situations are always subject to change. The best estate plans will offer flexibility to enable family members to modify a plan when faced with changed circumstances. This becomes particularly important when Congress makes major modifications to laws, as recently occurred in late 2017. In particular, trust arrangements that are regularly employed in estate planning deserve a second look to address such legislative changes and offer the opportunity to adapt to any future tax law changes. Rather than adhering to complicated plans with complex structures, estate planners can add flexibility and simplicity and achieve tax advantages 3. The disclaimant has not accepted surviving spouse can utilize the by utilizing qualified disclaimer any of the benefits of the tax exemptions of the first spouse, trust planning and the Clayton QTIP disclaimed property; and remove subsequent growth from the election. taxable estate, and provide creditor 4. As a result of the disclaimer, protection if desired. Conversely, if the interest passes without What is a disclaimer? circumstances warrant, the survivor any direction on the part of the may choose to accept a bequest to disclaimant and passes either (a) A disclaimer is a refusal to accept obtain maximum control and flexibility to the spouse of the decedent, property or assets passing by gift over the subsequent distribution of or (b) to a person other than the or bequest, as under a will or similar the estate. Additionally, the survivor disclaimant. document. For federal gift tax may still be able to utilize the estate purposes, a disclaimer of property A disclaimer meeting all foregoing tax exemption of the first spouse will not be treated as a taxable gift requirements is known as a “qualified under a concept known as exemption by the disclaimant (i.e., the individual disclaimer” pursuant to §2518 of the portability. This approach gives the disclaiming the property) to the Internal Revenue Code. surviving spouse maximum flexibility individual or entity to whom the in terms of whether a disclaimer property passes if the disclaimer trust should be created, and if so, the meets the following requirements: How are disclaimers used in trust planning? extent to which the trust should be 1. The disclaimer is in writing; funded. 2. It is made within nine months of Qualified disclaimers can establish a the latter of (a) the day on which “wait and see” approach to determine When would it be the transfer creating the interest what is most suitable for a family beneficial to utilize a in such person is made (generally, based on state and federal estate “Clayton” QTIP election? the date of death of date of gift), or laws, creditor protection concerns, (b) the day on which the disclaimant and overall estate distribution A qualified terminable interest attains age 21; objectives. A disclaimer by the property (QTIP) trust enables the 1845260 | 3/3/2022 grantor of the trust to provide for a estate tax exemption portability is surviving spouse’s acceptance of the surviving spouse and maintain control available, estate can be reduced property, and there is no problem with of how trust assets will be distributed or eliminated as well. giving the surviving spouse a power once the surviving spouse passes The Clayton QTIP approach, first of appointment over the remainder away. Income generated from the authorized in Estate of Clayton, 976 interest, as there is in a disclaimer trust is given to the surviving spouse F.2d 1486 (5th Cir. 1992), and later trust. to ensure that the spouse is taken accepted by the IRS in Treas. Reg. 25- Additionally, the decision to make care of for the rest of his or her life. 2518-2(e)(5), Example 5, is a variation the Clayton QTIP election is typically Some of the requirements for a QTIP on the conventional testamentary made by an independent personal trust include that: QTIP trust which can add additional representative, avoiding any gift tax 1. The surviving spouse is the sole flexibility in anticipation of future tax exposure to the surviving spouse, lifetime beneficiary of the trust; law changes. Rather than vesting and placing the decision making in the 2. All income must be distributed to the power solely with the surviving hands of a third party to account for a the surviving spouse every year at spouse (as under the disclaimer blended family situation. a specified interval; and option), the Clayton QTIP gives the decedent’s executor or personal Conclusion 3. No person has a power during the representative the discretion to surviving spouse’s life to appoint determine how much of the estate While tax laws may change and any part of the property to any should pass to a QTIP, based on an fluctuate with any given congressional person other than to the surviving assessment of assets and the tax cycle, it is important to remember spouse. Additionally, the deceased landscape. The portion not elected that many conventional planning spouse’s executor must make an to pass to the QTIP trust then passes techniques may prove to be a election to treat all or a specified to a non-marital trust share also workable solution to provide portion of the trust property established for the survivor’s lifetime for estate planning flexibility. as qualified terminable interest benefit. Conventional marital trust planning property. devices, such as using qualified The Clayton QTIP approach may disclaimers and the Clayton QTIP One of the benefits of the QTIP trust have some slight advantages over election, may help to determine the is that trust assets receive a step up in using a disclaimer trust. With the best course of action regardless of basis at the survivor’s death, enabling Clayton election there is no danger whatever future tax law changes heirs to avoid capital gains taxes. If of waiving the disclaimer by the occur.

Scott Garrison, JD, joined The Nautilus Group in 2015 as a member of the Case Development Team. Before joining Nautilus, Scott worked in private practice with a primary focus on estate, business and tax planning matters for high net worth individuals and small business owners. Scott attended Texas Christian University where he earned his B.A. in English, and earned his JD from Texas A&M University School of Law. His background includes over ten years of experience in estate, business and tax planning as well as real estate, oil and gas, civil litigation and administration.

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