While there is a present lapse in the estate and generation-skipping transfer taxes, it’s likely that Congress will reinstate both taxes (perhaps even retroactively) some time during 2010. If not, on January 1, 2011, the estate tax exemption (which was $3.5 million in 2009) becomes $1 million, and the top estate tax rate (which was 45% in 2009) becomes 55%. Assuming the federal estate tax (FET) exemption is reinstated at $3.5 million or more, then for most people the FET has been repealed. According to the Tax Policy Center, only five of every 100,000 people who die have estates over $3.5 million.
For married couples with taxable estates, the common planning tool is for each spouse to establish a revocable living trust. Upon the death of the first spouse, an amount equal to his/her FET exemption is allocated to a Credit Shelter Trust (CST). Other terms for the Credit Shelter Trust are Bypass Trust, Family Trust and Residuary Trust. A CST allows the surviving spouse broad access to the assets in the CST without the assets being included in the spouse’s estate. Thus, the CST allows Cialis Jelly each spouse to leave his/her FET exemption to their children. Without a CST, the first spouse to die “wastes” his/her estate tax exemption.

The provisions that the spouse can enjoy from the CST during his/her lifetime (without causing the assets in the CST to be taxable in the surviving spouse’s estate) are:

1. The spouse can have all of the income of the CST. Treas. Reg. Sec. 25.2518-2(e)(5), Example 4. Alternatively, the trustee can “sprinkle” the income of the CST to children and grandchildren so as to shift that income to lower tax brackets, or can accumulate the income and add it to principal.

2. The spouse can receive principal distributions from the CST (see Paragraphs 5 and 6 below).

3. The spouse can have the power to withdraw the greater of $5,000 or 5% of the principal of the CST each year. IRC Section 2041(b)(2).

4. The spouse can have a testamentary limited power of appointment (LPA) over the assets in the CST. An LPA allows the spouse to “rewrite” the dispositive provisions of the CST. However, the LPA is usually drafted so that the LPA can only be exercised in favor of the grantor’s descendants and/or charities. The LPA cannot be exercised in favor of the spouse, his/her creditors, his/her estate, or the creditors of his/her estate. IRC Section 2041(b)(1).

5. The spouse can be the sole trustee of the CST, provided that distributions to the spouse are limited to an “ascertainable standard” (i.e., health, education, maintenance and support). IRC Section 2041(b)(1)(A).

6. Distributions to the spouse in excess of the ascertainable standard can be made from the CST if an independent co-trustee is named to serve with the spouse, but discretion on distributions to the spouse must be limited solely to the independent co-trustee.

7. The spouse can have the power to remove the co-trustee and appoint an individual or corporate successor co-trustee that is not related or subordinate to the spouse (within the meaning of IRC Section 672(c)). Rev. Rul. 95-58.

The deceased spouse’s estate, over and above the amount allocated to the CST, will pass estate tax free to the Marital Trust because of the unlimited marital deduction. When the surviving spouse dies, the assets in the Marital Trust (along with the assets in the spouse’s Living Trust) will be subject to estate taxes, but only after subtracting the surviving spouse’s FET exemption.

The two most common types of Marital Trusts are the General Power of Appointment (GPA) Trust and the Qualified Terminable Interest

Failure by the surviving spouse to satisfy all of the federal requirements set forth above will result in the disclaimer being treated as a taxable gift Silagra from the spouse to the remainder beneficiaries of the CST (i.e., the children and grandchildren).

In summary, for a married couple whose combined estate may or may not exceed the FET exemption, a disclaimer trust will provide the couple with the greatest degree of flexibility. But, for couples with children from a prior marriage, a disclaimer trust will not guarantee that the children will receive an inheritance (as would be the case where the CST is funded automatically with the deceased spouse’s FET exemption). Even with a first marriage, the surviving spouse could remarry and leave the estate to the new spouse with a disclaimer trust. Finally, care must be taken immediately after the first spouse’s death (when the spouse may be unable to cope with making financial decisions) to protect the qualified disclaimer. Thus, the flexibility found is disclaimer trusts may not be right for every couple and, therefore, the couple should consult with an experienced estate planning attorney.

THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION.

Author Bio: Julius Giarmarco, J.D., LL.M, chairs the Trusts and Estates Practice Group of Giarmarco, Mullins & Horton, P.C., in Troy, Michigan. For more articles on estate and business succession planning, please visit the author’s website, http://www.disinherit-irs.com, and click on “Advisor Resources”.

Category: Legal
Keywords: estate planning,disclaimer trust