2005-10-06 / Business & Finance

Disclaimers In Estate Planning

I have a different background than that of most financial writers. I was a prizefighter. I had 38 professional fights, winning 31. In 1975 I was rated as the number 9 Heavyweight Con-tender in the world (the same year that I graduated college). A few years after I quit fighting, I became a referee. I have refereed 31 world championships in eight countries over the last 20 years. Although I like to confine my refereeing to professional fighters, oc-casionally I have to referee clients.

Just as the heart and circulatory system are the “operating system” of the human body, cash flow is the ope-rating system of financial planning. Cash flow is the positive, zero, or ne-gative number that one gets when sub-tracting expenses from income. When calculating a cash flow, arriving at the “income” number is fairly easy. For salaried people, two consecutive pay stubs will generally do the job. Ex-penses, on the other hand, are often difficult and dangerous to calculate.

I have had couples in my conference room almost come to blows over Who spends what. “You mean to say that you spend this on that?” Is countered with, “Yeah! And you spend this on that?” These days I give them a living expense list and ask them to fill it out at home.

Another area of financial planning that can produce “disagreements” is the use of trusts in estate planning. If you have an estate in excess of $1 million and you are married, you should not give all of it to your beloved spouse at your death. Instead, your will should set up a trust that can accept assets in excess of the “exemption amount.” (What is he talking about?)

The exemption amount is what is not taxed at death. This year that amount is $1.5 million. If you have an estate of $2 million and you die this year, you could give all of it to your spouse and no tax would be due. However, if your spouse were also to die this year, an estate tax of about $200,000 would be due.


The surviving spouse dies with an estate of $2 million. One-and-a-half million is their exemption amount; the other $500,000 is subject to the estate tax. The estate tax rates begin at 37percent and rapidly go up to 50 percent , so the estate tax on $500,000 is approximately $200,000. Not a pretty picture.

The solution to the problem is to have a “complex” will. This instrument-planning provides the exemption amount ($1.5 million this year) to the surviving spouse.

The balance of the testator’s (the deceased) estate goes into a trust created by the will. The surviving spouse is generally the living beneficiary of the trust as well as being one of the trustees. In the event of their death it is not in their estate, so no tax is due at the death of the surviving spouse.

This is the “textbook” solution to the estate tax problem. However, in my conference room I have heard the words, “You’ve got to be kidding. I’m not putting a nickel into that trust because I may need the money.”

This is where we introduce the concept of a “disclaimer”. A qualified disclaimer is a device that can be used in post-mortem estate planning. Al-though it does seem like an oxymoron, post-mortem estate planning is not only possible, it is often beneficial. A disclaimer is a device that permits the recipient of a gift, the heir to an estate, or the beneficiary of a trust to renounce his/her gift, inheritance or share of the trust.

This is a tool that we use to soothe the skittish spouse. A complex will, as described above, is drawn, but instead of directing an amount to go to the trust, all assets are bequeathed to the spouse. At the first death, the surviving spouse can retain all the money if they choose, or they can disclaim some or all of the money. Whatever the spouse disclaims will go into the trust.

The above paragraph represents a “textbook” case. However, all cases are not “textbook.” A disclaimer can be used in many ways. It can even be used to fix “I love you” wills.

For example, in the “I love you” will described above there was an estate tax of $200,000 on a $500,000 estate. Let’s assume the following: Harry and Wanda have a combined estate of $2 million and two children, Sam and Diane. Harry had a simple; “I love you” will that left everything to Wanda upon his death in 2005. Wanda, if she wishes, can use the disclaimer rules to renounce $500,000 of the assets left to her under the will. These assets will then go to Sam and Diane, thus saving about $200,000 in estate taxes at her death.

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