Federal tax law allows an unlimited transfer of property to a surviving spouse without imposing any estate tax. This is a result of the "unlimited marital deduction." In addition to the unlimited marital deduction, Federal tax law allows every individual to transfer a specific amount tax-free at death to a beneficiary or beneficiaries other than a spouse. This amount, called the "exemption equivalent amount," is currently $5,000,000.

If you are married and you leave everything to your spouse upon your death, your estate will not have to pay any estate taxes due to the effect of the unlimited marital deduction. However, upon the death of your spouse, all amounts in excess of the unified credit amount will be subject to Estate Tax at a rate of 35%.

For high net-worth married couples, the way to avoid or minimize this tax problem is to establish an estate plan so that upon the death of the first spouse a “Family Trust” (also called a "Credit Shelter Trust" or "ByPass Trust" or “B Trust”) is created. Typically, the purpose of the Family Trust is to provide support for the surviving spouse during his or her lifetime, with the remainder of the trust then going to the children upon the death of the surviving spouse.

Flexible Planning Using a Disclaimer-Funded Family Trust

Given the uncertainty of the future estate tax laws, many married couples desire to preserve post-death flexibility as to whether to establish a Family Trust upon the death of the first spouse. To allow this flexibility, many couples will establish estate plans leaving everything outright to the surviving spouse, but providing a Disclaimer-Funded Famil Trust in the event that the surviving spouse chooses to file a disclaimer. The idea is that the surviving spouse will meet with the estate planning attorney after the death of the first spouse to decide whether to disclaim and, if so, how much to disclaim. In making this decision, the surviving spouse would consider the amount of the assets, the status of the estate tax laws at that time, and his or her own economic needs.  A sufficient amount could be disclaimed to fully fund the Family Trust of the first spouse to die or to partially fund the Family Trust. Partial funding of the Family Trust might be preferred because the amount not disclaimed, which will still be owned outright by the surviving spouse, may be less than the applicable exclusion amount available to that surviving spouse.

If you are interested in an estate plan using a Family Trust, more details can be discussed at your first appointment.