By Laurence Keiser, CPA, Stern Keiser Panken & Wohl

The most obvious effect of the increase in the applicable estate tax exemption amount is to raise the planning threshold from $675,000 to $1 million. A more subtle effect is on married couples with assets in excess of $1 million. Where a formula credit shelter provision (i.e., an amount equal to the amount that can pass free of estate tax) is used, more assets will pass to the credit shelter trust and less assets will pass to the surviving spouse. Although this may be the best solution for estate tax savings, it may be unacceptable psychologically.

The typical estate plan for a married couple with combined assets in excess of the applicable exemption amount usually combines a credit shelter trust (CST) with a marital provision for the balance. Although the surviving spouse can get the benefit of the assets held in the CST, its value will not be includible in the taxable estate of the surviving spouse. To achieve optimal funding of the CST, each spouse should have enough separately owned assets to fund the trust. Jointly held property passes to the survivor by operation of the law of most states and hence cannot be used to fund the CST, without the complexity of a disclaimer.

A disclaimer is a refusal by a beneficiary to accept property. The statutory requirements of IRC section 2518 provide that the disclaimer must be in writing and be filed within nine months of the date of death, and the recipient must not have already accepted any benefit from the property disclaimed. Once property is disclaimed, it passes under the will as if the disclaimant had predeceased.

Although one can not disclaim “in favor of” someone else, documents can be drafted to anticipate a disclaimer. A disclaimer trust is often used when, despite the obvious tax benefits, either or both of the spouses, at the time the wills are drafted, are reluctant to have assets placed beyond their control. In such a case, all the assets are left to the surviving spouse, but the will provides that any assets disclaimed by the spouse pass to a CST.

The greatest flexibility can probably be provided by the disclaimer trust described above. In that way, the surviving spouse can decide how much to disclaim, and the disclaimed portion will pass to the CST (and not to children outright).

One potential downside of relying on a disclaimer will is that the surviving spouse may not disclaim. This issue increases in significance in a second marriage situation where the surviving spouse is not the parent of the remaindermen of the CST.

The objection to a CST is generally that there is a co-trustee in control of distributions. Typically, the CST allows distribution of income and principal at the discretion of the trustee other than the spouse. Under the laws of many states (including New York), the spouse may be the sole trustee of the CST. If the spouse has discretion to distribute to herself, however, the trust value will be included in the spouse’s estate, unless the distribution is pursuant to an ascertainable standard (health, education, support, and maintenance). If the trust provides that all the income is distributable to the spouse and invasions of principal are permitted only for the surviving spouse’s health, education, support, and maintenance, the spouse can be the sole trustee.

It is also possible to specify a credit shelter amount or to modify the formula to provide a cap. For example, the will could provide that the spouse not get less than a certain amount. (If a pecuniary formula is used, one must also consider that the funding could create a capital gain.)

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