Probate & Trust Law Section Conference Manual ... - Minnesota CLE

IV. The Disclaimer-Based Estate Plan and Hard-to-Value Assets
One of the advantages of the disclaimer based estate plan is its flexibility. It allows the surviving
spouse to use the optimal (rather than unlimited) marital deduction and appropriately use the
deceased spouse’s estate tax exemption to fund the credit shelter trust. The surviving spouse may
decide within the nine months after the predeceasing spouse’s death whether, and to what extent,
to fund the credit shelter trust based upon a review of then-applicable tax laws, her financial
needs and anticipated life expectancy. In many instances this flexibility makes the disclaimer
estate plan the plan of choice for “small estates.” This has been especially true over the course of
the last decade when Federal exemption amounts were constantly changing and Minnesota decoupled
from the Federal estate tax.
Notwithstanding the disclaimer trust estate plan’s several advantages, there are instances where
such plans can be less user-friendly. One instance where the implementation of the disclaimer
estate plan can be problematic is where hard-to-value assets must be allocated between the
marital share and the credit trust share. The allocation of assets between the marital share and the
credit trust share is relatively straight forward where the assets consist of cash or marketable
securities; the process is more delicate where the assets are closely-held business interests or real
estate. Where the allocation involves assets, the valuation of which is more subjective, there is a
risk of over-funding the credit shelter share and triggering an estate tax liability.
Assume the following hypothetical facts. H dies with a $1.5 million estate comprised of 200
acres of farm land and $500,000 of cash and c.d.s. His wife has her own separate estate worth
more than $1,000,000. W believes the value of the land is $5,000/acre. Conventional planning to
minimize Minnesota estate taxes would have $1,000,000 of H’s estate allocated to the credit
shelter share with the other $500,000 going to the marital share. Under a disclaimer trust estate
plan W might be inclined to disclaim all 200 acres of farm land and keep the liquid assets. If the
land really has a fair market value of $5,000/acre the credit share would then be funded with
$1,000,000.However, if the land is determined to have a fair market value of $6,000/acre the
credit share would be funded with $1,200,000 triggering a Minnesota estate tax liability of
$45,200.
How might W use a disclaimer trust estate plan and guard against this valuation risk? There are a
several potential solutions. First, W could choose to take a conservative approach and disclaim a
fractional share of the farm land certain to keep the amount allocated to the credit share safely
below $1,000,000. Perhaps she would disclaim only 75% of the real estate so that if the fair
market value of the land is finally determined to be $6,000/acre the credit share would be funded
with only $900,000. However, such an approach could mean leaving money on the table.
Another way W could guard against allocating too much land to the credit share would be to use
a fractional formula disclaimer under Code §2518(c)(1) and the corresponding regulations. Such
formulas are not new, of course. They have been used in testamentary planning for years.W’s
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