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DOES
YOUR OLD ESTATE PLAN STILL Revisiting your estate plan every few years is a good idea even if the tax laws have not changed since the plan’s execution. When the tax laws do change though, revisiting your estate plan takes on added importance. The Economic Growth & Tax Relief Reconciliation Act of 2001 (“EGTRRA”) made major changes to the estate tax laws. Forget about repealing the estate tax, which may or may not occur, and instead concentrate on what’s in store beginning in 2002. Under EGTRRA, the size estate that can pass free of estate tax (the “credit shelter amount”) will increase in 2002 from the present $675,000 level to $1,000,000. With proper estate planning, beginning 2002 a married couple can leave their children up to $2,000,000 estate tax free. Traditionally, proper estate planning meant that a husband and wife divided assets between themselves so that they each had assets at least equal to the credit shelter amount. Each spouse also executed estate plan documents designed around a “minimum marital” formula. The minimum marital formula caused the assets of the first spouse to die to be allocated between a Family Trust and a Marital Trust. The credit shelter amount was allocated to the Family Trust, and the balance to the Marital Trust. The surviving spouse was the sole beneficiary-a requirement to get an estate tax marital deduction-of the Marital Trust, and a beneficiary (with or without the children) of the Family Trust. At the surviving spouse’s death, the Family Trust passed to the children estate tax free. The surviving spouse was often given the unrestricted right to withdraw Marital Trust principal. Access to Family Trust principal was a different story. For the Family Trust to pass to the children estate tax free at the surviving spouse’s death, the Internal Revenue Code forced married couples to make a difficult decision. The trustee could have unrestricted discretion to distribute Family Trust principal to the surviving spouse, in which case the surviving spouse could not be trustee. Alternatively, the surviving spouse could be trustee, but the surviving spouse could access Family Trust principal only under the relatively narrow “mesh” standard (maintenance, education, support and health). Many a married couple opted for the mesh standard; they didn’t like the idea of asking a third-party trustee for “their” money, even if the trustee could distribute the surviving spouse Family Trust principal for any reason. More importantly, the Family Trust’s narrow mesh standard was not viewed as a hardship for the surviving spouse/trustee, because the surviving spouse had unrestricted access to the Marital Trust. Married couples who took comfort in knowing the surviving spouse had unrestricted access to the Marital Trust and planned their estates accordingly should reassess their comfort level in light of EGTRRA. Beginning in 2002, when the credit shelter amount becomes $1,000,000, there may not be a Marital Trust for the surviving spouse to access. If the deceased spouse had $1,000,000 in separate assets, the minimum marital formula-which allocates the credit shelter amount to the Family Trust-will result in the entire $1,000,000 being allocated to the Family Trust. With no Marital Trust to access and Family Trust principal accessible only under the mesh standard, the surviving spouse may no longer be happy with the estate plan design. The fact that the surviving spouse need not ask a third-party trustee for money may not provide the surviving spouse solace. The number and complexity of the solutions to this vanishing Marital Trust problem is chiefly limited by the estate plan advisor’s creativity. One potential solution is to have each spouse’s estate plan documents tentatively allocate all of the spouse’s separate assets to a Marital Trust if the spouse leaves behind a surviving spouse. The surviving spouse can decide how much of the tentative allocation should remain in the Marital Trust. Any part of the tentative allocation that the surviving spouse decides should not remain in the Marital Trust is used to create a separate trust. The surviving spouse is a beneficiary of the separate trust, and can also be the trustee thereof. Although the surviving spouse/trustee will still be subject to the mesh standard for separate trust principal access, the surviving spouse at least has control over whether there will be a Marital Trust that can be freely accessed. As married couples give their estate plans a fresh look, they would do well to ask themselves whether their old estate plan still meshes with the new tax law. October 2001
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