Marital/Non-Marital Share Wills

by Richard T. DeCou, Esq.

For married couples having combined estates in excess of the threshold figure (currently $675,000) for federal estate taxes, it has been customary to create an estate plan in which the estate of the first to die will create a non-marital “by-pass” trust (ordinarily the Residuary Trust, Credit Shelter Trust, or Family Trust in our documents), to which the first dollars (up to threshold amount) are directed. Dollars in excess of the threshold amount are directed to the surviving spouse’s marital share (eligible for the marital deduction).

Because of the recently enacted substantial increase in the threshold for federal estate tax, these estate plans should be reviewed to be sure that the surviving spouse is not being shortchanged:

It is important to remember that in many cases the two spouses will have divided their assets roughly half and half so that the surviving spouse will have roughly half of the combined estates, regardless of the terms of the will of the deceased spouse. But the allocation of the decedent’s estate, first to the non-marital share, could result in the surviving spouse receiving no excess. When the nature of their assets has prevented a 50-50 division, no excess could leave the surviving spouse short. However, in many cases the surviving spouse will be an income beneficiary of the non-marital share, in the form of the by-pass trust. So, in those cases the surviving spouse will continue to receive benefit from all of the combined assets, as was the case before spouse’s death. A 50-50 division of assets and the beneficial interest of the surviving spouse in the by-pass trust will mitigate the effects of the possible allocation problem for many couples.

In the worst case, the non-marital share may have been left to persons (the children, perhaps) other than the surviving spouse. The couple may have sufficient assets that the surviving spouse could spare $675,000, or even $1,000,000. But sparing $3,500,000 is a different matter.

Even in those cases in which the spouse is the lifetime beneficiary of the non-marital by-pass trust, consideration should be given to what will wind up in the by-pass trust and what will be held by the surviving spouse. If the surviving spouse lacks at least a 50% share of the whole, she or he may feel unduly constrained. And, with the exemption increasing, such constraint may no longer be required for the purpose of achieving zero taxes.

Possible alternatives include:

1. The increased federal estate tax exemption may exceed the combined estates, making a non-marital share unnecessary in order to achieve zero taxes. In this situation, leave everything to the surviving spouse, free of trust.

2. The non-marital share could be capped, in dollars or percentage terms, or the marital share could have a floor, or minimum.

3. Use of “disclaimers” will become increasingly common. The decedent could leave everything to spouse, trusting spouse to disclaim some assets, if a non-marital share is necessary to avoid or reduce death taxes. Disclaimed property would go to a standard non-marital by-pass trust with income and other benefits for the surviving spouse.

The disclaimer approach provides the greatest flexibility and greatest likelihood of attaining the ideal between tax saving and benefit to surviving spouse. At least in theory. However, emotional loss makes it difficult for surviving spouses to disclaim, and there are substantial requirements in timing, awareness and asset suitability which may make disclaimer difficult or impossible in particular cases.

In summary, if you are a married couple with a marital/non-marital share plan, you should now pull out your documents and review them in light of the new law and your present financial circumstances.

© 2001 Capehart & Scatchard, P.A.