What is a Disclaimer Trust?

A Disclaimer Trust gives the surviving spouse the option to divide the original trust into two trusts after the death of the first spouse. This decision is largely based on tax considerations (i.e., whether an estate exceeds the federal exemption limit).

When the first spouse dies, the surviving spouse must decide whether to divide the original trust into a “Survivor’s Trust” and a “Disclaimer Trust”. The Survivor’s Trust contains the surviving spouse’s trust property; the surviving spouse has full access to the income and principal in this trust. In addition, the Survivor’s Trust remains amendable and revocable by the surviving spouse.

The Disclaimer Trust contains the trust property that had been owned by the deceased spouse. The income is paid to the surviving spouse, but the beneficiaries designated by the deceased spouse receive any remaining principal once the surviving spouse dies.

If a surviving spouse wants to exercise the right to disclaim and divide the trust into two trusts, he/she must make a written disclaimer within nine months of the date the deceased spouse died. A surviving spouse cannot disclaim assets from which he/she has already accepted benefits (so seeking timely legal advice is very important). If the surviving spouse does not exercise the right to disclaim, the original trust continues on, which means the surviving spouse has the power to amend or revoke the trust. Thus, there is the risk that the surviving spouse could change the beneficiary designations that the deceased spouse had chosen.