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Estate planning for a married couple
includes using two basic Federal
estate tax "shelters". The first such "shelter" is
the unlimited marital deduction. The unlimited marital
deduction means that a U.S. citizen spouse may leave to his or her
U.S. citizen spouse any amount of assets without having to pay any estate taxes. However, the unlimited marital
deduction may not be the best estate planning technique because
assets that escape estate taxes on the death of the first spouse are
likely to be heavily taxed on the death of the surviving spouse.
Therefore, the marital deduction only defers estate taxes until the
death of the surviving spouse, it does not eliminate estate taxes.
The second estate tax "shelter" is
this: Every U.S. citizen can (in 2002) leave up to
$1,000,000 to any other U.S. citizen or entity without incurring any
Federal estate tax. This is what we call the "coupon" amount.
This "coupon" amount will increase to $1,500,000 in 2004; $2,000,000
in 2006; and $3,500,000 in 2009. In 2010, the Federal estate
tax is repealed, and in 2011 the Federal estate tax is brought back
with a "coupon" amount of $1,000,000. With a married couple,
each spouse has his or her "coupon" amount, for a combined "coupon"
amount (in 2002) of $2,000,000.
The Marital Trust-Family Trust Estate
Plan allows a married couple to take advantage of both "shelters",
making sure that there are no Federal estate taxes on the death of
the first spouse, as well as making sure that there are little or no
Federal estate taxes on the death of the surviving spouse.
This is how the Marital Trust-Family
Trust Estate Plan will typically work (click here to see a printable
version of the
Marital Trust-Family Trust Estate Plan Diagram):
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Both spouse's
Wills or Revocable Living Trusts will provide that the first
deceased spouse's estate is divided into 2 parts: The
Marital Trust and the Family Trust.
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The first spouse's
"coupon" amount is allocated to the Family Trust. Remember,
that in 2002 the "coupon" amount is $1,000,000. This means
that the Family Trust may be funded with as much as $1,000,000.
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The Family Trust can provide the
surviving spouse with as much income and principal as needed for the
surviving spouse's health, education, and maintenance. This
means that the Family Trust may provide as much as necessary to
the surviving spouse to keep him or her in his or her accustomed
standard of living.
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The Family Trust
may also designate the children and grandchildren as the
beneficiaries of the Family Trust while the surviving spouse is
still alive.
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Because the assets
in the Family Trust are equal to the first spouse's "coupon"
amount, there will be no Federal estate taxes to pay at the first
spouse's death on the assets in the Family Trust. The Family Trust is designed so
that it is not included (and therefore not taxed) in the estate of
the surviving spouse. Furthermore, the appreciation on the
assets in the Family Trust also escape Federal estate taxes on the
death of the surviving spouse.
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Assets which are valued (at the
time of the first spouse's death) over the first spouse's
available "coupon" amount are allocated to a Marital Trust.
The Marital Trust is not subject to Federal estate taxes because
of the unlimited marital deduction. However, the Marital
Trust will be included in the surviving spouse's estate.
However, because the surviving spouse has his or her own available
"coupon" amount, there may be no Federal estate taxes due at the death of the surviving spouse.
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The Marital Trust may provide
that all assets are distributed outright to the surviving spouse,
or that all of the assets are held in trust for the surviving
spouse's benefit.
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If the assets are held in the
Marital Trust for the surviving spouse's benefit, then the Marital
Trust must provide that all of the net income from the Marital Trust
is distributed to the surviving spouse.
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Although
the Marital Trust must distribute all of the net income to the
surviving spouse, it can provide the
surviving spouse with as much of the principal as needed for the
surviving spouse's health, education, and maintenance. This
means that like the Family Trust, the Marital Trust may provide as
much as necessary to the surviving spouse to keep him or her in
his or her accustomed standard of living. However, the
surviving spouse should make sure that the Marital Trust pays all
of the expenses, rather than the Family Trust. The reason
for this is simple: The Family Trust will not be subject to
further estate taxes, but the Marital Trust will be included in
the estate of the surviving spouse. Therefore, if more the
surviving spouse can reduce the Marital Trust, the less will be
included in his or her estate.
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One of the
benefits of this type of Marital Trust is that the first spouse
can specify the beneficiaries of the Marital Trust
at the death of the surviving spouse. For example, the
Marital Trust is perfect for situations where there are children
from a prior marriage, or where there is a need to protect the
assets from the surviving step-parent spouse.
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