Vol. 14, No. 3, Pg. 42. Disclaimer Trusts - a wait and see approach to estate planning in light of EGTRRA.

Author:By Michael J. Howell

South Carolina Lawyer


Vol. 14, No. 3, Pg. 42.

Disclaimer Trusts - a wait and see approach to estate planning in light of EGTRRA

42Disclaimer Trusts -- a wait and see approach to estate planning in light of EGTRRABy Michael J. HowellOver the years it has been difficult to offer affluent clients the simplicity of a plan leaving all assets to the surviving spouse because of the potential estate tax costs involved. However, with the uncertainty caused by the Economic Growth and Tax Relief Reconciliation Act of 2001, also known as EGTRRA, it may be somewhat easier by using disclaimer trust planning.

44Prior to EGTRRA the majority of married clients with significant assets used a variation of a Trust A-Trust B plan. Basically, the plan was based upon a formula that places all assets over the amount that is exempt from estate taxes into a Trust A (Marital Deduction Trust) with the exempt amount going into a Trust B (Credit Shelter Trust or Bypass Trust).

The intent was to have an estate tax of zero at the first death by placing up to $1 million into the Trust B if death occurred in 2006 or later, with the remainder going into Trust A. Both trusts were designed to benefit the surviving spouse. Most, if not all, of Trust B is non-taxable when the surviving spouse dies because it is not considered part of the survivor's taxable estate.

Trust A qualifies for the unlimited marital deduction from estate taxes at the first death and causes the first estate not to be taxable, even if it is over the exemption amount. Trust A is taxable when the surviving spouse dies along with the survivor's other assets.

In many cases, the provisions of these trusts were as liberal as possible. This is based upon the assumption that the trusts, especially Trust B, were only being used to save estate taxes. Therefore, they should not be as strict as they otherwise could be. Typically, both trusts provide that the spouse receives all income. The trustee of Trust B can invade principal for the benefit of the surviving spouse by utilizing an ascertainable standard such as health education, maintenance or support. Trust A can also provide that the surviving spouse can withdraw trust principal at any time. Trust A may also give the surviving spouse anunlimited power to appoint or leave the assets in the trust upon his or her death to whomever the surviving spouse chooses. An exception to these rules would apply when a QM' Trust is used to limit the surviving spouse's discretion over trust principal.

For even greater flexibility, Trust B frequently gives the surviving spouse the right to withdraw the greater of $5,000 or five percent of the gross value of the trust principal on a noncumulative annual basis. This may have some negative estate or capital gains tax issues associated with it. Sometimes Trust B gives the surviving spouse a special power to appoint or leave assets upon his or her death to issue or to others in a manner other than specified in the trust.

This type of Trust A-Trust B planning was designed to save up to...

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