Tax Sensitive Will a/k/a By Pass Will

This is my 3rd post in this Will Series – The By Pass Will. If you want to check out the previous two posts they are:

The type of Will I am going to explain has many many names, but a few of the more common ones include:

  • Credit Shelter Will;
  • Two Pattern Trust Will;
  • A/B Will;
  • Tax Sensitive Will
  • etc.

By Pass Estate Flow

Regardless of what it is referred to as, it has one major differentiating factor between itself and the Simple Will – it uses both spouses’ Credit Shelter Amount. Before you just quit reading, I promise to take this subject really really slow.

Credit Shelter Amount

The credit shelter amount (CSA) is the amount the government allows you to pass to any U.S. Citizen non-spouse tax free. This year it is $2,000,000 next year it is $3,500,000, in 2010 it is unlimited, and in 2011 it reverts back to the 2001 level of $1,000,000. Right about now those “death tax” arguments should be getting clearer – i.e. if you die in the year 2010 you can leave an unlimited amount to any person you choose, but if you die in 2011 you start getting taxed at a 55% (it is currently capped at 45%) for amounts passing to any non-spouse over that CSA amount of $1,000,000. Without going into details, when Bush the 2nd wanted to repeal the Estate Tax, he needed the Democrats to agree, so they put this sunset provision in there, probably assuming that when 2010 hit Congress would just extend an unlimited CSA amount indefinitely; but, that has a zero chance of happening considering our country’s debt.

  • You should note that I said U.S. Citizen Non-spouse, because you can leave your spouse an unlimited amount (this wasn’t always the case if anyone had parents with significant net worth who died before 1981). This leads to complex planning for same sex couples of significant net worth. Also take note that there are special rules for non-US citizens that I will tackle in another post.

As the diagram shows, at the first death we are carving out a certain amount and throwing it into a Credit Shelter Trust – this trust will then be used to benefit the surviving spouse, but he/she won’t have full access to it…the surviving spouse, if he/she needed, will have to ask the trustee for cash. Usually, we can’t say always because each document is different, the Credit Shelter Trust will provide income to the surviving spouse and a way to get to principal (via Trustee’s discretion) based on Health, Education, Maintenance and Support.

Why do it? What is the trade off? Beyond control issues it is simple – The amount put into the Credit Shelter Trust is not included in the surviving spouse’s taxable estate.

Lets look back to our Simple Will:

2 Variations of the Simple Will

If the surviving spouse gets it all then any amount being left to a U.S. Citizen non-spouse over that CSA amount is going to be taxed, as such we failed to use the first decedent’s CSA. Using a By Pass will, we will use both credits. With relatively simple planning you can pass LARGE sums of money without incurring any taxes. If you properly titled assets and had your Will set up perfectly you could pass $4,000,000 this year, and up to $7,000,000 next year without incurring any taxes!The CST can be funded 2 ways:

  1. Automatically;
  2. Funded by anything disclaimed (how to disclaim will be a later post)

The amount not passing via the provisions of the Credit Shelter Trust will either pass to the surviving spouse outright or in a separate marital trust (your options when leaving $$$ to a spouse will be covered in a different post). It should be noted that this is not the type of will you are likely to find in your Blumberg form, Quicken, or Suze Orman home kit, but to be honest, I have never seen any of those so maybe they have these provisions.

I am sorry for the lengthy post, I just love this stuff!

As per my disclaimer one should always consult a legal or tax professional before implementing any type of testamentary documents.

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