As part of President Bush’s 2001 tax reform package, the amount of the estate tax exemption (credit shelter) for 2009 has risen to $3,500,000 per individual. In 2010 there will be no estate tax and in 2011 the exemption will revert to the Clinton level of $1,000,000. President Obama has indicated that he will propose making the $3,500,000 exemption permanent. In addition, he will propose the “portability” of any unused exemption of a married decedent for the benefit of his or her surviving spouse. This will have the effect of exempting the first $7,000,000 of the combined estates of a married couple from the federal estate tax.
By allowing any unused exemption of the first spouse to die to pass to the surviving spouse by operation of law, many married couples are now free to use simple joint trusts to hold their assets rather than tax motivated, and often complicated, separate trusts. Currently, the most common method of estate planning used by married couples with assets greater than the estate tax exemption, which has increased from $600,000 to $3,500,000 over the past ten years, is to create separate trusts which “shelter” the exemption of the first spouse to die. The assets of the first spouse to die are divided into two Trusts. The first trust, known generally as the “credit shelter” trust, the “family” trust, or simply the “B” trust, is funded with the decedent’s assets up to the amount of the credit shelter exemption. The assets of this trust are available after death to the surviving spouse, but with “strings” attached. If the surviving spouse has too much control over the “B” trust, the value of the Trust’s assets at the surviving spouse’s death are included (and taxed) in his or her estate. The second Trust, known generally as the “Marital Trust” or the “A” trust, holds the assets of the decedent spouse which are above the credit shelter amount. These assets are not taxed, and are generally available to the surviving spouse, with no strings attached. The assets of trust “A” will be included in the estate of the second spouse to die.
The “portability” feature of the proposed new estate tax exemption should make estate planning easier and less expensive for married couples with assets over $3,500,000 but less than $7,000,000. In addition, all couples who have already established separate trusts to take advantage of the $600,000 to $3,500,000 exemptions of the past may want to consider revoking those trusts in favor of a simpler joint trust. Not only is a joint trust simpler to administer, it allows greater flexibility to the surviving spouse. Under an A/B trust, a couple with up to $7,000,00 in assets may find that all or part of the assets of the first spouse to die are held for the surviving spouse in the “B” trust, with unnecessary strings attached. This could be avoided by using a joint trust, with no loss of tax benefit, at least at the federal level.
Joseph W. Kenny is a director and shareholder of Hamblett & Kerrigan, P.A. and practices in the areas of estate planning and taxation. He is also a Certified Public Accountant with certification as a Personal Financial Specialist. You can reach Attorney Kenny by email at [email protected].