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The Unified Credit Shelter Trust

By Lawrence E. Howes; CFP™
By Joel B. Javer; CFP™  

A Unified Credit Shelter Trust or Family Trust or By-Pass Trust or an A-B Martial Trust is established to receive property at death equal to the “exclusion amount.” 

Thus, the amount in the trust is carved out of your estate and does not go directly to your spouse but is still subject to estate taxes.   

However, the amount subject to taxes is offset by the unified credit and hence no tax is due.     

Under Economic Growth and Tax Relief Reconciliation Act [EGTRRA], the increased exclusion amount, formerly $1,000,000 and scheduled to increase to $3,500,000 in 2009 and expires in 2010, presents another planning issue. Smaller estates need to be careful, so that the majority of the estate doesn’t end up in the credit shelter trust. 

Example 

A medical practitioner with a $1.5 million estate, dying in 2003 would have $1,000,000 allocated to the credit shelter trusts, leaving only $500,000 outright to the surviving spouse. The surviving spouse may be surprised to find out that the majority of the estate is in trust and will be subject to withdrawal limitations.   

In 2004, when the exclusion amount increased to $1,500,000 the entire estate may go into trust leaving nothing out right to the surviving spouse.  These trusts need to contain provisions to allow the spouse access to the money under what is called an “ascertainable standard.” 

This standard permits money to be paid out for health, education, maintenance and support [HEMS].   

IRS Language 

This language has been approved by the IRS and should never be tampered with.   If the trust document provides the spouse broader withdrawal power, the risk is that the assets in this trust could be included in her estate, which defeats the purpose of carving out the trust assets in the first place. 

Upon your spouse’s death, the assets in the trust are paid to your beneficiaries, commonly the children.  If the beneficiaries are minors, provisions are included for their well being until ultimate distribution, similar to the terms indicated previously under the testamentary trust.   

Example: 

A powerful effect of the trust is the potential for appreciation in trust value.   

If for example, the trust starts out at $1,000,000 and then 7 years later the spouse dies, the trust might have appreciated to a $2 million or more and the appreciation is not subject to estate taxation.   Drafting of trust language to allow for changing amounts and to accommodate different wording by Congress is important to avoid having to create new documents every time Congress decides to make changes.   

Assessment 

However, due to the far reaching effects of EGTRRA, all estate plans and documents should be reviewed by estate planning attorneys and informed financial advisors.  

Conclusion 

Please opine and comment if you have ever considered or used this strategy; and what was the result? How will the current political climate affect the estate tax situation?

Book info: http://www.jbpub.com/catalog/0763745790/ 

Institutional: www.HealthcareFinancials.com 

Linguistics: www.HealthDictionarySeries.com

Filed under: Estate Planning | Tagged: Estate Planning |