Charting a Course for Family Security

Estate Over $3,500,000



If your estate is valued over $3,500,000 or is expected to grow over $3,500,000 after year 2009, it is generally advisable for you to set up separate revocable trusts, one for each of you. Each of you would serve as trustee of your own trust (and could be co-trustee of the other's trust). These trusts would be fully revocable and amendable by each of you during your lifetime. Consequently, you would remain in complete control of your assets and retain complete flexibility to manage and sell your own assets.

Generally, the plan would be to divide your assets in half and then each of you to transfer your one-half ownership into your own separate revocable trust. You could also pick and choose specific assets to go into each trust. The best result (to minimize estate taxes) would be to have at least $3,500,000 worth of assets in the trust of the first of you to die. Since, of course, you do not know which of you that will be, the goal would be to placed at least $3,500,000 worth of assets in each of your trusts.

Upon the death of the first of you to die, that person's trust would divide into two sub-trusts, a Marital Trust and a by-pass or Exemption Trust. The Exemption Trust would be funded with your $3,500,000 exemption amount. The Marital Trust would be funded with the excess over your $3,500,000 exemption amount. As a result, there would be no federal estate taxes at the first death.

The Marital Trust would be held for the surviving spouse's lifetime with net income going to the surviving spouse and principal to the surviving spouse in the trustee's discretion.


If the intention is to give the surviving spouse as much flexibility as possible, the Exemption Trust could have the following attributes:

  1. The surviving spouse could be the trustee. Thus, the surviving spouse would be in charge of the management and investment of the assets held in the exemption trust.
  2. All of the net income could be payable to the surviving spouse. This would include all interest, dividends and rentals on assets held in the trust.
  3. The surviving spouse could have the right to take the principal out of the trust for purposes of his or her health, education, maintenance and support.
  4. The surviving spouse could be given a limited power of appointment, exercisable by his or her will, to redistribute the trust among either a class limited to your descendants or a broader class which could include anyone he or she selected other than his or her creditors or estate.
  5. During the lifetime of the surviving spouse, the Exemption Trust is not subject to the claims of the surviving spouse's creditors and upon the surviving spouse's death passes tax free to your children or other beneficiaries.

Upon the death of the second of you to die, tangible personal property (items such as furniture, furnishing, jewelry, clothing and personal effects) could be distributed either according to a separate list or among your children as they agree. The balance of the trusts could either then be distributed to your children or continued to be held in trust for the benefit of your children until they reached more mature ages. The trusts, of course, could be distributed to whoever you designate in the trust agreement in whatever proportions you wish.

To the extent that you have titled ownership of your property into your trusts prior to your death, you would avoid probate of those assets and thus reduce settlement costs and delay.

The reason this form of planning saves estate taxes is that it makes use of both of your $3,500,000 exemptions, You see, each of you, husband and wife, are entitled to a $3,500,000 exemption for property passing to somebody other than a spouse. You are also entitled to an unlimited marital deduction for property passing to a spouse. Thus, if one of you were to die and leave your entire estate outright to the other, there would be no estate taxes at the first death because of the unlimited marital deduction. As the second death, however, there would be only one $3,500,000 exemption available.

Under the two trust form of planning previously described we make use of both of your $3,500,000 exemptions and are therefore able to get $7,000,000 to your children tax free rather than just $3,500,000 tax free. The reason is that at the first death, the $3,500,000 amount which goes into the Exemption Trust is taxable but no tax is payable because we used the first to die's $3,500,000 exemption. The Exemption Trust then passes tax free at the second death to the children, or continues for their benefit until they reach more mature ages.

Even though the surviving spouse is the trustee of the Exemption Trust, gets net income from this trust and can withdraw principal for purposes of his or her health, education support and maintenance, and has the right to change the beneficiaries of this trust at the time of his or her death, this trust, for tax purposes, is not considered to be a part of the surviving spouse's taxable estate. Accordingly, the Exemption Trust (including any appreciation or growth from the date of death of the first of you to die until the date of death of the second of you to die) will pass free of federal estate taxes to your children at the second death.

The primary objectives of this form of planning would be to reduce estate taxes at the death of the second of you to die and also to avoid probate of your assets at both deaths. These savings would result in substantial benefit to your children since it is at the death of the second of you to die that expenses would be largely saved.

If the intention is to give the surviving spouse some benefits but not maximum flexibility (so as to protect assets for children in case of the surviving spouse's remarriage) then the Marital Trust could be made non-withdrawable and the flexibility of both the Marital and Exemption Trusts could be limited.


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