Fedele and Murray, P.C.

17 Walpole Street, Norwood, MA 02062-3318 - (781) 551-5900

Marital Deduction Planning

The basic idea behind estate tax planning is that one should pass to one's spouse, through the estate tax "marital deduction," the minimum amount of assets necessary to eliminate federal estate taxes. The balance of the estate should be placed into a trust that will not be part of the surviving spouse’s estate at such spouse’s subsequent death. This simple maneuver can save significant estate taxes for any couple whose combined assets exceed $22,400,000 in value (twice the 2018 Federal estate tax threshold of $11,200,000). Each spouse would create a revocable trust which would provide that all assets held in the trust would be held for the exclusive benefit of the trust’s creator, i.e., each of the respective spouses, and after the first death everything would be held for the survivor.

For example, the husband's trust would provide that after his death his wife would receive in a "marital deduction trust" that amount of his estate as essentially equals everything in excess of the $11,200,000. (That is the exempt amount applicable amount for 2018.) From that marital trust the wife would be entitled to all the income it produces (such as bank account interest, dividends on stock, etc.) and the right to the exclusive use of any assets in that share that do not produce income (such as the exclusive use of the husband’s share of any real estate to the extent he had retained the ownership of it). If the wife ever needed more than the income, the trustee (who for this purpose must include someone other than herself alone) can give her any amount from the principal. In addition, she could have the personal right to withdraw five percent of the principal annually without requiring the consent of an outside trustee. Finally, at the wife’s death, she could have the power to decide to whom the marital deduction share will pass, such power to be exercised by her will. Typically, the power is limited (but need not be) in such a way that if the couple has any surviving descendants she can only give it to those descendants and/or their spouses. This approach automatically “disinherits” any strangers (such as the wife's new husband!).

The balance of the estate, the $11,200,000, would be held in what some people call a "by-pass trust." This latter trust would provide benefits to the wife without placing those assets into her estate. That trust would by-pass the estate tax at her death.

For example, the by-pass trust in which the $11,200,000 would be held could provide:

All of these rights can be given to the wife and yet she would not be deemed to be the "owner" of the trust principal at her death, so that none of it would be in her estate for estate tax purposes. Keep in mind that the amount that "by-passes" the surviving spouse's estate is the appreciated value of the trust, i.e., whatever income has been accumulated therein plus whatever appreciation in value of the principal that has been realized.

In order for each spouse to be able to create similar marital deduction and by-pass trusts and have the tax savings work, it is necessary that each spouse have sufficient assets in their respective names. As a minimum, because one can never know who might die first there should be in each name, counting half of any jointly owned assets (which should not continue to be jointly owned), at least $11,200,000 (so that each spouse can take advantage of this "exempt" amount).

As a result of changes in the Massachusetts estate tax law (see The 'New' Massachusetts Estate Tax), the amount of the marital deduction trust may need to be everything in excess of $1,000,000, the current Massachusetts estate tax threshold. Thus, the by-pass trust may only be funded with $1,000,000 instead of $11,200,000. However, it is also possible to have the marital deduction trust split into separate shares to take into account the differences in the Federal and Massachusetts marital deductions. Thus, for example, if a decedent had a $15,000,000 estate, to eliminate both the Massachusetts and Federal estate taxes, a total of $14,000,000 ($15,000,000 less $1,000,000) would go into the marital deduction trust. Of the $14,000,000 that would go into this trust, $3,800,000 would go into a marital deduction trust for Federal and Massachusetts purposes ($15,000,000 less the Federal exemption amount of $11,200,000) and the balance of $10,200,000 would go into a marital deduction trust for Massachusetts purposes only. Ultimately, the $3,800,000 trust would be includible in the surviving spouse's taxable estate for both Federal and Massachusetts purposes, but the $10,200,000 amount would be includible in the surviving spouse's Massachusetts estate only. (Assuming also the proper elections are made on the first spouse's estate tax returns.) Thus, for Federal purposes, a total of $11,200,000 ($1,000,000 from the by-pass trust and $10,200,000 from the Massachusetts only marital deduction trust) would still by-pass estate taxation at the surviving spouse's death.

While the marital deduction trusts are designed to minimize the overall estate taxes that may be paid upon both spouse's deaths, it is always important to remember that one's own intentions for the disposition of one's assets should take precedence over the tax savings. Our goal at Fedele and Murray, P.C. is to create an estate plan that will take advantage of potential estate tax savings within the framework of our clients' expressed intentions.

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