• Ronald A. Flate

New Estate Planning Technique

When an individual dies, there is the possibility that his or her estate will be subject to the federal estate tax. However, only estates exceeding a certain level in value are subject to this tax. That level is now set at $1 million for persons dying in the years 2002 and 2003. The current $1 million exclusion amount is based on what is called the “unified credit against estate tax.” In the case of an unmarried person’s death, the application of the unified credit is straightforward. In 2002 and 2003, an unmarried person can leave the $1 million exclusion amount tax-free to whomever he or she wishes. Similarly, each spouse of a married couple is entitled to leave the exclusion amount tax-free at his or her death.

In the case of a married couple, estate planning steps can be taken to insure the maximum use of the unified credit. The typical situation is where each spouse (assuming, for purposes of the example, the death of the first spouse in 2002 or 2003) has an estate worth something less than the $1 million exclusion amount. If the husband’s estate is worth $750,000, for instance, and he dies first, his estate will escape the estate tax because its value is below the exclusion level, but the $1 million exclusion amount will not be fully used by his estate. The ideal would be to move assets from the wife’s estate to the husband’s estate so as to bring his estate to the $1 million level. This would allow the full use of the exclusion in the husband’s estate and would reduce the value of the wife’s estate so that, given the likely increase in the value of the wife’s assets following the husband’s death, the wife’s estate may be kept below the $1 million exclusion amount at her death.

There is a new estate planning technique that accomplishes that goal without the need for an actual gift from the wife to the husband in order to bring the value of his estate to $1 million. The technique, which utilizes a “credit shelter trust,” requires the couple to establish a joint revocable trust that becomes irrevocable upon the first spouse’s death and gives that spouse the power to dispose of the trust’s assets as he or she chooses by will.

It is crucial that the spouses grant each other “general powers of appointment” so that property in the trust from the surviving spouse is treated as coming from the deceased spouse. The deceased spouse’s will would direct that an amount from the trust needed to bring the value of his or her estate to the $1 million exclusion level is to be placed in a credit shelter trust contained in his or her will for the express purpose of using the entire $1 million exclusion amount. Thus, where the husband dies first and had a gross estate of $750,000, the terms of the joint revocable trust established by both spouses and the husband’s will would place $1 million in the husband’s credit shelter trust ($750,000 from the husband and $250,000 from the surviving spouse).

It is important to note that this technique was approved by the IRS in a “private letter ruling” and, therefore, general acceptance by the IRS is not guaranteed. Because of the complexity of the technique, the steps outlined above should not be taken without consulting a qualified professional.

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