Lack of Estate Tax Might Mess Up Your Estate Plan

A standard estate plan for a married couple uses “A-B” trusts. Upon the death of the first spouse, the single trust is split into the decedent’s trust and the survivor’s trust. The amount in the decedent’s trust is usually equal to the federal estate tax exemption. The remaining assets go to the survivor’s trust for the surviving spouse’s benefit.

The problem with this setup in 2010 is that a deceased spouse may unintentionally give the surviving spouse nothing. With no federal estate tax, all assets pass to the decedent’s trust, leaving nothing for the survivor’s trust. The decedent’s trust most likely benefits the surviving spouse, but probably has many more restrictions than the survivor’s trust. For example, the surviving spouse may only be an income beneficiary with the remainder going to the children. This setup can also cause a couple to pay more state estate taxes than necessary.

For more details regarding the problems caused by this setup, see David Kozak and Steven Fox, Lapsed Federal Estate Tax Creates Couples Trap, Forbes, July 21, 2010.