O—Trust Will

A will creating a trust can provide for the continued management of estate assets for a surviving spouse and assure that the estate will eventually pass to children upon the death of the surviving spouse. With large estates a trust can freeze the value of property during the surviving spouse’s lifetime so that future appreciation will not be subject to federal estate taxes upon the surviving spouse’s death.

UPON THE FIRST DEATH, with the typical trust will, the estate is divided intotwoparts, with one part placed in a family or nonmarital trust (“B” trust in the chart). No taxes are paid on this since the amount is equal to or less than the applicable exclusion amount (i.e., the amount that each individual can pass tax-free to the next generation).

Unless there is a disclaimer, the remaining estate is passed to the surviving spouse. This qualifies for the unlimited marital deduction and can be passed free of federal estate taxes. Although it is sometimes given outright, this portion of the estate is often placed in trust, which is referred to as either the “A” trust or the “marital deduction” trust. If the property is placed in trust, the spouse should be given a life estate with a power of appointment or a QTIP interest.

The surviving spouse can also be given a right toall incomefrom the “B” trust, as well as the right to demand, each year, either $5,000 or 5 percent of the trust corpus, whichever amount is larger. Property subject to a $5,000 or 5 percent demand right held at death is subject to taxation in the surviving spouse’s estate only to the extent of the demand right.

UPON THE SECOND DEATH in 2022, unless the surviving spouse’s estate exceeds $12,060,000 (projected) (as indexed for inflation), the estate will not be subject to federal estate taxation. The amount previously placed in the “B” trust passes tax-free to the children under the terms previously established in that trust. Since the surviving spouse has no power to control the disposition of property placed in this trust, it is not included in the surviving spouse’s estate.