Mr. Schaffer passed away in 2004. At the time of Shaffer’s death, the dollar amount that could be passed free of estate tax was just over $700,000. At that time, Mrs. Schaffer wasn’t relying on those funds to live (the funds which were transferred to the credit shelter trust under the provisions of her husband’s estate plan), so she disclaimed her interest in the credit shelter trust. In plain and simple terms, this means that those specific assets passed immediately to the Schaffer children.
As you might imagine, Mrs. Schaffer ended up being taken to court by the IRS, who argued that Mrs. Schaffer disclaimed her interest in the $700,000 allocated to the credit shelter trust, therefore an estate tax was due because the value of assets disclaimed was in excess of the amount that could be passed free of estate tax. The IRS maintained that the language of the estate plan was clear: the credit shelter trust was to be funded with the $700,000, and any amount disclaimed by Mrs. Schaffer was to be added to the credit shelter trust. The IRS won the case, and the Schaffer family paid hundreds of thousands of dollars in estate taxes.
In this particular case, the attorney who prepared Mr. Schaffer’s estate plan could have simply allocated the designated securities to the credit shelter trust without an additional disclaimer by Mrs. Schaffer, and the estate tax imposed by the IRS could have been avoided. This story is yet another cautionary tale of why it is imperative to retain the services of an attorney who specializes in estate planning and knows intimately the ins and outs of the law.
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