Estate tax savings with a Trust under the current law

The question regularly comes up as to why a married couple should create a trust that splits into one or more subtrusts on the death of the first individual. While this discussion can be a rather lengthy one, the answer is that the internal revenue code does not currently allow the first spouse's estate tax exemption amount to be added to the surviving spouse's exemption amount for purposes of calculating the estate tax liability of the estate. Therefore, if a family wants to use both spouse's estate tax exemptions, they must create one or more irrevocable trusts on the first individual's death to use that person's exemption, and then on the surviving spouse's death, they may use their exemption amount on the remaining property that is contained in their taxable estate. If a family does not have an estate that is greater than one spouse's estate tax exemption amount (currently 3.5 million per person), then a trust can be set up that gives the surviving spouse access to and absolute control over all of the assets held in the estate. However, if the estate is greater than 3.5 million, then the splitting of the trust into two or three trusts on the death of the first person is necessary to maximize the two exemptions that are available to them.

One other reason that will also be investigated in a future post is that if the trust does not split into different trusts, then the surviving spouse may change the disposition plan over all of the assets. This often occurs when the surviving spouse remarries and there may be other children or beneficiaries that become people to whom the survivor wants to distribute assets to. By setting up a trust that becomes partially irrevocable on the death of the first spouse, there is certainty that the deceased spouse's wishes will be fulfilled with at least half of the estate.

In summary, if you have an estate that is worth over 3.5 million in 2009, then you should consult with your attorney to determine if you have an appropriate level of tax planning built into your revocable trust. More will be written on this topic in the future as we see what changes to the estate tax law the Federal Government makes.