Exemption trust will.
As in the Simple Will chart on page 27, our example in 2009 uses an estate of $7,500,000. (1)
UPON THE FIRST DEATH, with the typical exemption trust will, the estate is divided into two parts, with one part equal to $3,500,000 placed in a family or nonmarital trust ("B" trust in the chart). (2) No taxes are paid on this amount since the trust takes full advantage of the $1,455,800 unified credit available in 2009 (i.e., the amount that each individual can pass tax-free to the next generation). (3)
Unless there is a disclaimer, the remaining $4,000,000 of the estate is passed to the surviving spouse. (4) This qualifies for the unlimited marital deduction and can be passed free of federal estate taxes. (5) Although it is sometimes given outright, this portion of the estate is often placed in trust, which is referred to as either the "A" trust or the "marital deduction" trust. (6) If the property is placed in trust, the spouse should be given a life estate with a power of appointment or a QTIP interest. (7)
The surviving spouse can also be given a right to all income from the "B" trust, as well as the right to demand, each year, either $5,000 or 5 percent of the trust corpus, whichever amount is larger. Property subject to a $5,000 or 5 percent demand right held at death is subject to taxation in the surviving spouse's estate only to the extent of the demand right.
UPON THE SECOND DEATH, the estate subject to taxation will generally be limited to $4,000,000. After paying taxes of $225,000, there remains $3,775,000 to be passed to the children, or other heirs, along with the $3,500,000 from the "B" trust (assuming that the surviving spouse had no separate property). (8) The amount previously placed in the "B" trust passes tax-free to the children under the terms previously established in that trust. Since the surviving spouse has no power to control the disposition of property placed in this trust, it is not subject to taxation in her estate.
INFORMATION REQUIRED FOR ANALYSIS & PROPOSAL
Attorney Drafting Will Must Know
1. Spouse's name.
2. Children's names.
3. Name of executor/executrix.
4. Ages of minor children.
5. Names and ages of other beneficiaries.
6. Trustee after testator's death.
7. To whom, in what amounts, and when trust income is to be paid.
8. To whom, in what amounts, and when trust corpus is to be paid.
CROSS REFERENCES TO TAX FACTS ON INSURANCE & EMPLOYEE BENEFITS (2010)
Q 863. Description of the estate tax marital deduction.
Q 866. Credits which may be taken against the estate tax.
Q 867. Description of the unified credit.
(1) As with the Simple Will chart, the $7,500,000 estate is equivalent to the adjusted gross estate as shown in the Federal Estate Tax chart on page 19. It is also assumed there were no prior lifetime taxable gifts which required use of the unified credit.
(2) This is often referred to as a limited trust will, in that the amount placed in the "B" trust is limited to the unified credit equivalent, $3,500,000 in 2009 if no lifetime taxable gifts were made (see footnote 6, page 21). This trust is also referred to as a bypass, unified credit, credit shelter, credit amount, or credit equivalent bypass trust. If most property is held by a husband and wife in joint title with right of survivorship, the "A" trust could be overqualified and there may not be $3,500,000 of other property available to place in the "B" trust. In contrast, when a tax-driven formula is used to determine the amount going to the "B" trust, it may become overfunded (e.g., when a will directs that the amount to the "B" trust shall be the maximum amount that can be passed without paying an estate tax). In contrast to the Exemption Trust Will, see the Marital Plan Will, page 533.
(3) The $3,500,000 generation skipping transfer tax (GSTT) exemption can be used when there is a desire to pass property to grandchildren while avoiding estate or gift taxation at the children's generation (see chart, page 45).
(4) There may be occasions when it is desired to give the surviving spouse the opportunity to take more, or less, property than would be received under the typical exemption trust will. This can be accomplished with the use of disclaimers, which are more fully explained on page 406.
(5) There may be circumstances in which the testator will not wish to take advantage of the unlimited marital deduction. For example, by taking full advantage of the marital deduction, the business asset will continue to appreciate in the estate of the surviving spouse. This potential appreciation would be eliminated by passing the business to the children or other heirs upon the first death. However, the cost to do this is the early payment of estate taxes on business values in excess of $3,500,000. Of course, considerations other than financial ones may influence the ultimate decision (e.g., adult children working in the family business have a strong desire to take over operation and full ownership of the business, rather than to receive the business upon the ultimate death of the surviving parent). Generally, the marital deduction is unavailable when the surviving spouse is not a United States citizen unless the transfer is to a qualified domestic trust (see expanded discussions, pages 481 and 505). For an expanded discussion of the marital deduction, see page 468.
(6) One type of marital deduction trust is also referred to as a "power of appointment" trust, in that the surviving spouse is given a general power of appointment over the trust during lifetime or at death. For a discussion of the power of appointment trust, see page 468.
(7) Refer to page 41 for a chart illustrating the use of a qualified terminable interest property trust. Also, see page 498 for a discussion of powers of appointment.
(8) To simplify the example, the tax is calculated assuming there are no debts, expenses, deductions, or prior taxable gifts. This means the computation base is equal to the gross estate (see calculation steps set forth on page 95). The tentative tax of $1,680,800 is calculated from the tax table on page 571. Subtracting the unified credit of $1,455,800 produces a tax of $225,000 ($1,680,800 - $1,455,800 = $225,000). Survivorship life insurance is often used when all estate taxes are deferred until the deaths of both husband and wife. The premium outlay for a survivorship policy insuring both husand and wife is typically less than that required for a policy insuring either the husband or the wife (see discussion, page 552).