New Thinking in Estate Planning for Husband and Wife

A separate, revocable trust for each spouse has been my standard practice in estate planning for a married couple.  This assured maximum use of each spouse’s Internal Revenue Code §2010 exemption, provided the couple’s property was equally divided between their trusts.

As a lawyer engaged to assist a couple in their estate planning, I could not fund their trusts other than equally, unless unequal funding is in both spouses’ best interests, and they both consented upon being fully informed.

Where the marital assets include a closely-held business, funding a one-half interest in the business into each spouse’s trust could enable each spouse’s estate to avail of minority interest discount in valuing the spouse’s interest in the business in his or her gross estate for Federal estate tax purposes, thereby saving estate tax upon succession to the business.

One exception to equal funding of marital property into spouses’ trusts is where one spouse is vulnerable to civil judgments, such as a physician practicing a high-risk specialty.  There, we might fund a disproportionately large amount of marital assets into the non-vulnerable spouse’s trust, and have the vulnerable spouse accumulate assets in  a qualified retirement plan, availing of 29 U.S.C, §1056(d)(1) immunity from state-law judgments.

The concern is what happens in the event of a divorce.  My stock response has been that a divorce court is a court if equity.  Equity is superior to law.  A court of equity is not bound by legal boundaries of trusts.  A divorce court will marshal all of the marital property, including that held in trusts, and divide the hochpot equally between the divorcing spouses.  But you really can’t be sure what a court will do before it acts in a given case.  If spouses have unequally divided their property into separate trusts, a court might sustain that division upon their divorce.

My thinking on estate planning for a married couple has evolved.  One trust may be better than two. The trust I envision may be revoked or amended by both of the spouses acting together.  When one spouse dies, a separate Credit Shelter Trust is created.  Property up to an aggregate value equal to the I.R.C. §2010 exemption amount available to the deceased spouse’s estate funds the Credit Shelter Trust.  Distributions may be made from the Credit Shelter Trust to or for the benefit of the surviving spouse as needed for his or her health education, support or maintenance.

Trust assets not funded into the Credit Shelter Trust, if any, are held in a Marital Trust.  Income of the Marital Trust shall be paid to the surviving spouse at least quarterly.  Upon the death of the surviving spouse, assets in the Credit Shelter Trust are distributed as the husband and wife have specified in the trust instrument.  Remaining assets in the Marital Trust are distributed as the surviving spouse appoints, or, in default of such appointment, as otherwise provided in the trust instrument.

In such an estate plan, there is no Federal estate tax at the death of the first spouse to die.  At the death of the surviving spouse, the surviving spouse’s estate is subject to Federal estate tax on the property remaining in the Marital Trust, but only to the extent the aggregate value of that property exceeds the I.R.C. §2010 exemption amount available to the surviving spouse’s estate.

There are several legal arguments against a judgment creditor of one spouse attaching assets of such a trust.  First, the trust is revocable or amendable not by one spouse alone, but only by both spouses acting together.   Second, the assets in such a trust arguably represent tenancy by the entirety property, reachable only by a creditor of both spouses.  Finally, if a judgment against one spouse can attach trust property, surely it cannot attach the non-debtor spouse’s one-half beneficial interest in the trust property.

In the event of a divorce, the court surely would divide the trust asserts equally between the spouses.

Spouses are no worse off with one trust than with a trust for each spouse, and they may be better off.  I no longer automatically use separate trusts for spouses

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Stephen J. Dunn

Tax and Estate Planning Attorney and Author