How do families plan for the federal estate tax phase-out, when they don’t know whether Congress will act to extend it beyond 2010?

Many attorneys are now recommending that their clients establish what is known as a disclaimer will, said Mike Deege, a partner with Wilson, Deege, Dollar & Despotovich, a West Des Moines law firm that specializes in wills and estate planning.

The option, which was rarely used when the amount exempt from taxation remained at a steady $600,000 from year to year, is one that Deege recommends to all of his clients with assets of $1 million or more. A disclaimer will allows the surviving spouse more flexibility in how much he or she will set aside to a family bypass trust to protect those assets from taxation upon the survivor’s death.

“It’s designed so that the decision as to how much (of the marital share) that goes into that family bypass trust is not a decision that has to be made until after (the first spouse’s) death, and actually you have nine months after the death to make that decision,” Deege said.

On Jan. 1 the federal estate tax credit, or amount not subject to the tax, increased from $1.5 million to $2 million as part of the phase-out of the tax initiated by the Economic Growth and Tax Reconciliation Act of 2001. That credit will remain at $2 million for the next three years, and then jump to $3.5 million in 2009, and finally, in 2010, the tax will be repealed.

However, unless Congress acts to extend the repeal, the tax will be reinstated at the end of 2010, making amounts of estates over $1 million again subject to a 55 percent levy.

“With this rising and then shrinking credit, (a disclaimer will) provides some flexibility,” Deege said.

The will allows for three options for the distribution of the marital share of the estate:

– Give everything outright to the surviving spouse, who then has up to nine months to decide how much, if any, to disclaim to a family bypass trust;

– Give the assets to the spouse in a marital trust so that management assistance can be provided the surviving spouse, but also give the spouse the power to terminate the trust any time in the future;

– Establish a Qualified Terminal Interest Property trust, so that any assets left upon the death of the surviving spouse go to the children.

The first two options provide more control to the husband and wife over the disposition of the assets, while the third option provides a higher assurance that the remaining assets will pass to the children upon the surviving spouse’s death, Deege said.

Many couples opt to designate the surviving spouse as the trustee of the family bypass trust, which enables them to maximize the amount of assets they can disclaim to the trust, but still maintain a relative degree of control over the assets, Deege said.