State death tax credit in credit-shelter trust funding.

• Author: Hills, Marvin D.

Most estate plans provide that, on the closing of a decedent's estate, the assets are divided between a credit shelter amount and a marital deduction share. The credit-shelter trust is typically funded based on a formula defining the amount necessary after deductions to produce a tax equal to "all available credits." In this way, the tax on the funding of the nonmarital share is completely offset by credits, with no Federal tax due on the first spouse's death.

If the phrase "all available credits" is defined as only the Federal unified credit (Sec. 2011), the credit-shelter trust would typically be funded with $650,000 for the estate of a decedent who died in 1999 and had not used any of his applicable exclusion amount during life. If, however, the phrase "all available credits" includes the state death tax credit (Sec. 2012), the credit-shelter trust can be funded with $698,484.84. This taxable estate is determined based on the calculations and tax rate tables in Exhibit 1.

Exhibit 1: Taxable Estate Calculations Federal estate tax State tax credit Taxable estate $698,484.85 $698,484.85 Less: Exemption n/a (60,000.00) Adjusted taxable estate 698,484.85 638,484.85 Less: Base amount (500,000.00) (440,000.00) 198,484.85 198,484.85 Rate bracket x 37% x 04% Excess tax 73,439.39 7,939.39 Base tax 155,800.00 10,000.00 Tentative tax 229,239.39 17,939.39 Unified credit (211,300.00) N/A Net tax/credit $17,939.39 $17,939.39 Thus, if the credit-shelter trust is $698,484.85, the Federal tax of $17,939.39 will be completely offset by the maximum state death tax credit; no Federal tax would be owed. Obviously, if the only variable were the Federal estate taxes, it would be preferable to fund the credit-shelter trust with $698,485, rather than just $650,000, as the additional amounts in the trust (and all future appreciation thereon) will escape Federal taxes at the time of the surviving spouse's death.

"Pick-Up Tax" States

Many states assess death taxes in an amount equal only to the maximum state death tax claimed on the Federal estate tax return. These states are commonly referred to as "pick-up tax" states, as the only tax assessed is the amount claimed as a credit at the Federal level. In these states, if the credit-shelter trust is funded with no more than $650,000, there would be no state death tax credit claimed at the Federal level and no tax owed to the state. If, however, the credit-shelter trust is funded with $698,484.85, although there is...