My parents have had their lawyer draw up one of those revocable “by-pass” trusts for their wills. They have split up their holdings, such as they are, more or less equally into their repective trusts, and each, as surviving spouse, plan on “distributing” the assets of the first to die to their children, keeping their own trust assets to live on. My question is, can the surviving spouse simply transfer the deceased spouse’s assets like that, without incurring any tax bill. The amount to be transferred is under $1 million, so would federal estate tax not apply here, and so not affect deceased spouse’s estate, surviving spouse’s estate, or the children-heirs’ “distribution”?
I’m not a lawyer; your parents apparently consulted one. Do you believe the lawyer they consulted to be in some way incompetent or lacking in knowledge of estate law? If not, why do you fear that he’s set something up that is not permitted? I’ve heard an estate lawyer describe a bypass trust, and it sounded a lot like what you’ve described.
IANAL etc. Estate tax only applies to estates valued at over 1 million dollars (this year; that figure will increase incrementally until 2010 and in 2011 will revert to $600,000) so as long as the estate is valued under whatever figure is current at the time of the death there will be no estate taxes.
Well, I guess my question is–if the surviving spouse decides to give all she or he inherits away to the children-heirs by “disclaiming” (I think that is the word that was bandied about) the deceased spouse’s trust, does that by-pass trust enable him/her to do so without any federal estate tax or gift tax? Maybe it is fairly straightforward–at least before 2010–and it’s as simple as that.
The reason for my question, MLS–besides being certain that I’ll get some helpful comments from the dopers–is that I get only second-hand info from my parents, who, when asked about specifics, either act uncomfortable or say they can’t remember the exact specifics of what the lawyer told them. I guess I’ll just have to talk to the lawyer in the end.
Who, if he’s ethical, won’t tell you anything without your parents’ okay.
Is there only one trust, or are there separate trusts for each spouse? If there’s only one, I don’t understand how you can distinguish one spouse’s property from the others; it’s all owned by the trust. If each spouse has a separate trust, I don’t see why the surviving spouse is involved at all; the trust instrument should simply state the names of the beneficiaries of the trust, namely the children. There must be something additional about this that I don’t understand.
By the way, this may seem like semantics but it can be important in certain situations: ALL estates are subject to tax, but there is a credit against the tax equivalent to an exemption for the first $1 million. It’s possible to use up some of the credit prior to death, for instance by making large gifts which would otherwise be subject to the gift tax.
Also, each spouse gets an independent credit, and transfers between spouses are subject to the spousal exemption (i.e. spouses can transfer property back and forth between each other without being subject to estate or gift tax, regardless of the amount). The key to much estate planning is in transferring just enough property upon the death of the first spouse so that every last dollar of the first spouse’s credit is used up, and transferring the remainder to the surviving spouse (which, because of the spousal exemption, is not taxed). Then when the second spouse dies, s/he uses all of his/her own credit.
Anything left over at that point would be taxed. If done right, though, the credits of both spouses being “stacked” in this manner can result in as much as $2 million being transferred without being taxed. Isn’t this fun?
Thanks, Tom Eaton, just the kind of response I was looking for.
The lawyer set up two trusts–when one spouse goes, the surviving spouse, as you mentioned, gets it all. And I do not believe the children’s names enter in until the second spouse dies. But their (my parents’) idea is that then, within a reasonable time after first spouse’s demise, that amount (up to $1m) inherited by the surviving spouse will then be disbursed to the children/heirs, free of federal estate tax. Anything over the $1m, the surviving spouse will keep, and so add to his/her trust assets to live off.
The unified credit thingie you mentioned is not a problem, as all gifts, transfers, etc., have been under the $10,000 per year limit.
I understand the strategy of being sure to arrive at that $2m limit, but my question pertains to when the surviving spouse can start disbursing the $1m he/she gets from the deceased spouse’s estate. In other words, can it be done without incurring federal estate or gift tax before the death of the surviving spouse? And if, on the will documents–which I have not seen–the children’s names do not come into play until the death of the surviving spouse–is that a problem for the planned “disbursement” by surviving spouse of that inherited $1m in deceased spouse’s trust to his/her children (before surviving spouse’s death)?
Great fun!
I’d want to see the trust documents but it sounds like what the lawyer set up was an A-B trust. That’s what my parents have set up. Neither of them owns any property. All of the property is held in two trusts with my parents as joint trustees. Upon the death of one, the property of that spouse’s trust goes to my brother and me, but we have no power to access the trust until the death of the other spouse. The surviving spouse remains as trustee of both trusts and has the power to use the principle and the interest as s/he sees fit. Upon the death of the second spouse the other trust then goes to my brother and me in equal shares with full access to the property.
Otto, just the kind of response I was looking for! I think we are in the same boat. My question then would be: have you and your family talked over whether the surviving spouse could “distribute” to you and your brother any of the assets in the deceased spouse’s trust–before the surviving spouse has died–without any gift tax or estate tax consequences?
As trustees, my parents are both legally empowered to distribute any and all assets of either trust in whatever fashion they see fit. If they distribute more than $10,000 in a tax year to the same person then gift tax applies. Without getting into too many details of my and my parents’ personal financial lives, each of them has made distributions to my brother and me out of those assets. It doesn’t really matter which trust the assets come from since they are both trustees of each trust.
Otto–yes, I understand. My question remains: what is the tax-status of gifts or “distributions” to heirs (-to-be) after the first spouse dies, but before the surviving spouse does. My parents intend to take what the surviving spouse receives from the deceased spouse’s estate (assets residing in that revocable by-pass, or A-B, trust) and give it to the kids. If he/she does so, is that transfer subject to the same rules as before the first spouse died? Are those assets treated any differently after as before? ( Do you get my drift?) Or will the children/heirs have to wait until both parents are dead before getting thier dirty selfish paws on that $2m that is not subject to federal estate or gift tax? Man, getting this cleared up is killing me!
I think the answer you’re after is going to depend on the specific terms of the specific trust that’s been created. If the terms of the trust say the trustee can distribute while one spouse survives then the trustee can distribute. Distributions given as gifts which total in a tax year $10,000 or more will be subject to gift tax. AFAIK there is no restriction on the trustee draining the one trust dry as long as the terms of the trust permit it. Estate tax would not AFAIK apply because the assets are not legally from the estate of the deceased. The assets are from the trust.
If this is a matter of some personal urgency I would suggest you ask your parents to authorize their attorney to speak with you about it, or in the alternative seek the advice of a qualified estate attorney licensed in your jurisdiction.
Thanks, Otto. That I shall do.