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Legal Disclaimer


Each individual is entitled to leave federal assets with a value of $2,000,000.00 to someone other than his or her spouse without any federal estate tax being imposed on such transfer following his or her death.  The amount that may be left upon death without taxes varies from state to state (presently Minnesota is $1,000,000.00 and Wisconsin is $675,000.00).  Any person can leave an unlimited amount to his or her spouse without any estate tax consequences.  If assets are left in a trust for the benefit of an individual and that individual is allowed only the right to the income from the trust, the ability to withdraw $5,000.00 or five percent (5%) of the principal each year ("5 & 5 power") and an independent trustee has the discretion to make principal distributions to the beneficiary of the trust, then the assets in the trust are not considered to be includible in the estate of the beneficiary of the trust.  This is a specific exemption provided by the federal estate tax laws.  It is the interplay of the $2,000,000.00 lifetime exemption amount and the ability to leave assets of the trust for the benefit of the surviving spouse that has created the estate planning technique known as the Credit Shelter Trust.  The Credit Shelter Trust is the trust over which the surviving spouse has income rights, the 5 & 5 power, and from which the independent trustee can make discretionary distributions of principal to the surviving spouse.  The Credit Shelter Trust is also commonly referred to as the "Family Trust" or the "B Trust".

Description of the Plan
The Credit Shelter Trust planning tool is classic textbook planning.  It can be implemented in essentially two ways.  The first way is to have husband and wife divide their assets and put half in the wife's name and half in the husband's name.  They then prepare Wills or Living Trusts that provide upon a death of one of them, his or her assets are held in trust for the benefit of the surviving spouse.  The surviving spouse can have the right to income, may be given the 5 and 5 power, and an independent trustee is given the right to make discretionary distributions for the benefit of the surviving spouse. 

The trustee can be an outside party or it can be a child.  It has to be someone that is entirely independent or someone that has an interest adverse to that of the surviving spouse (a child had adverse interest because whatever is not distributed to the surviving spouse, the child will not get).  By doing this planning, each spouse can basically protect $2,000,000.00 from federal estate taxation, so that a total of $4,000,000.00 can be left to someone other than each other without any federal estate taxation.

The second basic alternative is to use a formula within a will or a trust to decide how much is going to be placed into the Credit Shelter Trust.  One formula can be that the amount that is placed in the Credit Shelter Trust is the amount of the assets held by the deceased spouse, up to a maximum of $2,000,000.00.  Another formula equalizes the assets between the portion that goes outright to the surviving spouse and the Credit Shelter Trust.  There are a number of variations on the formula.  The bottom line is that a decision must be made by the spouses as to how much and how they wish to fund the Credit Shelter Trust and how much the surviving spouse has access or control over.

The advantages of the Credit Shelter Trust are obvious.  It allows an additional $2,000,000.00 of assets to pass free from federal estate taxation.  If all assets were left to the survivor and then the survivor became deceased, then the survivor would only be able to protect $2,000,000.00 of assets from federal estate tax.  By using the Credit Shelter Trust planning, $4,000,000.00 of assets can avoid federal estate taxes.  This would save approximately $1,000,000.00 in federal estate taxes.

The disadvantages of the Credit Shelter Trust planning are more practical than legal.  One of the basic premises that we use in estate planning is that the estate plan not interfere with the way individuals want to live the rest of their lives.  In this regard, the initial division of assets one-half into the husband's name and one-half into the wife's name is often impossible to accomplish.  Often, the psychology of having the assets split into two names is something that clients do not want to or cannot deal with.  One elderly client of ours said to me that he had been married for fifty-three years and was not about to split their assets up like they were divorced.  Our argument that it would save estate taxes was not compelling to him.

Another practical disadvantage to the Credit Shelter Trust is that oftentimes spouses will be very reluctant to give up control over half of their combined assets.  We describe their rights under a Credit Shelter Trust as follows: they have the right to the income,  but they have to ask the trustee for more money.  Most clients have grown accustomed to living on their entire asset pool and to have the freedom and independence that that creates.  To tell them that because their spouse died, which is difficult enough to deal with, that then they have to give up full dominion and control over half of their assets adds another level of change to their situation that is often unacceptable to them.  We have had a surviving spouse tell us that when she asked for a distribution from the principal of the Credit Shelter Trust for travel the trustee suggested a different destination or traveling at a different time of year.  This resulted in severe agitation on the part of the surviving spouse of the trust because now someone else was telling her what she could do with "her money".  We also had a situation where a client had placed fifty percent (50%) of the stock of his company, which he had worked years to establish, into a Credit Shelter Trust that his wife had created to avoid estate taxes. His wife had her brother as the trustee of her Trust.  When we told him that if his wife died, his brother-in-law would control half of the stock of his company, he went ballistic.  The possible estate tax savings that would result from the Credit Shelter Trust simply did not offset the potential loss of control of his business.

The essential disadvantage of the Marital Deduction Trust is that the survivor is giving up absolute dominion and control over the assets in the Credit Shelter Trust.  If this is something that will make the survivor uncomfortable, then this planning tool does not work.

Marital Deduction Trust planning has been a very popular estate planning tool for decades.  It works very well to save federal estate taxes.  The federal estate taxes that are saved (assuming $2,000,000.00 in total combined assets) are approximately $1,000,000.00.  As with any estate planning tool, there are drawbacks.  Before utilizing the Marital Deduction Trusts as part of your estate plan, you should seek the advice and counsel of a competent estate planner.




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