RECENT CHANGES IN THE ESTATE TAX LAWS MEANS ITS TIME TO REVIEW YOUR WILLS!

Dividing Assets
For many years, people wishing to reduce or eliminate estate taxes would be told by their lawyers that they must divide what is jointly owned property into separate shares, approximately on a 50-50 basis between spouses. Spouses were less than happy about the division of their property since they looked at the marriage as a partnership of sorts. Do we need to continue to divide spousal property in the future?

Reasons For Dividing Assets
The reason for dividing assets was that if the property remained in a form of joint ownership, when one spouse died, all of the spousal assets would be owned by the surviving spouse. That would mean that when the surviving spouse died, all of the couple's assets would be taxed in the surviving spouse's estate. Not a good result. Thus clients were uniformly advised to divide the assets so that when the first of the spouses died, the Will would, by its terms, place into a trust, called by some a "credit shelter" or "by-pass" trust, an amount equal to the then $600,000 estate and gift tax exemption (currently the exemption has been increased to $1,000,000 per individual and will increase until year 2010 when the estate tax will be eliminated). By placing property equal to the exemption amount into such a trust, when the surviving spouse dies, the assets placed into the credit shelter trust would not be included in the estate of the surviving spouse and thus would not be subject to potential estate taxes. People in New York and elsewhere utilized this arrangement to produce the best tax result. Should they continue with this approach? No.

The Immediate Future
Since the law now provides for an escalating exemption, do we still need to continue with the credit trust or can we provide more flexibility to the family by allowing the surviving spouse to determine, after the death of the first spouse, just how much needs to put aside (into a trust). The decision will be made at the time of the death of the first spouse. It will take into consideration the amount of the exemption and the amount of assets the spouse then has. For example, lets look at a specific situation where the couple owns their assets jointly. Say their collective assets amount to $1.0 million. Upon the death of the first spouse, the second spouse would get everything; there would be no estate tax upon the first death because of the unlimited marital deduction. If the second spouse lives until January 1, 2002 when the exemption goes to $1.0 million, there would be no need for the by-pass trust. Indeed having such a by-pass trust would be an unnecessary impediment to the surviving spouse. If the surviving spouse died in 2002 or thereafter, there would be no estate taxes to be paid since the exemption would exempt the estate from the need to pay estate taxes. This result does not consider appreciation in the value of the assets.

Previously Divided Your Assets?
Even if you have previously divided your assets, all is not lost. All you need to do to provide flexibility for the surviving spouse is to redo your Wills or Living Trusts so that all of the property goes to the surviving spouse. Then the surviving spouse has the option, at that point in time, of deciding how much, if anything, to place into a trust (which will mean that the assets placed into the trust will not be subject to being included in the surviving spouse's estate). If the surviving spouse decides to place assets into a trust, it must be done with advice of a skilled professional. The Wills of the couple must be redrafted. The new Will will basically state that "if my spouse disclaims (meaning the surviving spouse does not want certain assets) any other assets obtained from me under this Will or outside of the Will (jointly owned property as an example), those disclaimed assets shall be placed into a Disclaimer Trust referred to in Section... of this Will."

When Not to Use a Disclaimer Trust
This disclaimer arrangement may not work well in second marriages or where a spouse is concerned that upon his or her death, the surviving spouse will remarry and the assets will end up in the hands of a person who has never contributed to the cache to begin with. This issue could be handled with a prenuptial agreement or with multiple trusts in a Will but sometimes there are other issues created by such an agreement.

Conclusion
The key here is to consider whether you really still need the old credit shelter trust arrangement in view of the increasing exemption from the need to pay federal estate taxes. Whatever you do, my best advice is to discuss it with an attorney or financial advisor that is skilled in this area of the law.