This type of trust is the estate planning cornerstone for marital property worth over $675,000 in 2001. While both of the spouses are alive, there is a single trust. This trust is revocable by the spouses and is completely under their control.
When the first spouse dies, the trust splits into 2 new trusts (A and B). The surviving spouse (usually the Trustee) divides the property and places some in each of the 2 trusts. The B (Bypass or Credit Shelter) trust is irrevocable, and uses the deceased spouse’s estate tax shelter which is the objective of the B trust. This trust is setup such that the federal estate tax “credit shelter” is placed in the B trust (for 1999, this amount is $650,000). This credit shelter must be used when the first spouse dies or it is wasted resulting in a tax liability. The goal of the B trust is to remove assets out of the couple’s combined estate so that it will not be taxed on the second spouse’s death.
If the couple uses a will instead of a trust, the first spouse to die will usually pass his/her entire estate to the surviving spouse with no tax liability. However, the chance to use both $650,000 shelters are lost. Thus, when the second spouse dies, only the second spouse’s shelter is available. Anything over $650,000 will be heavily taxed.
The surviving spouse’s rights to the property in the B trust include:
- All annual income produced by the trust.
- The annual, but non-cumulative right to withdraw the greater of $5,000 or %5 of the trust principal for any reason.
- The right to invade principal, if necessary, but limited to an “ascertainable standard” relating to the surviving spouse’s “maintenance, health, support or education.”
The A (Marital Deduction) trust is under the control of the surviving spouse. This trust is revocable at any time by the surviving spouse.