In the past, the Marital Exemption Trust or A/B Trust allowed married persons to escape certain estate taxes. Now, the estate tax is being gradually phased out until 2010. Without further legislative action, the estate tax will be restored in 2011. Because of the legislative uncertainty, is therefore difficult to predict whether the Marital Exemption Trust would be useful. However, a judicious estate planner may want to have a Marital Exemption Trust if the estate tax remains.

The estate tax is levied by multiplying the gross estate (plus adjusted taxable gifts) by the estate tax rate. Then, amounts in excess of a unified credit ($2,000,000 in 2007; $1,000,000 for each spouse) are subject to the federal estate tax. In the case of a married couple, each spouse is entitled to all of their unified credit and each spouse may pass to their children or others, tax-free, the full value of their applicable credit equivalent amount. Furthermore, when spouses leave their estates to a surviving spouse, the estate tax marital deduction is unlimited. However, the down side is that one spouse leaving their estates to the other pushes the value of the surviving spouse’s estate so it is beyond the credit equivalent.

This is avoided by using a joint trust that is revocable until the death of the first spouse and is known as the Marital Exemption Trust or A/B Trust. Because the marital deduction is unlimited, some think that they can leave their estates to their spouse with no estate tax consequences. By failing to plan, the married couple will have thrown away the deceased spouse's unified credit and, the deceased spouse will have stacked -- up to an amount equal to the annual estate exclusion amount that could have passed tax-free -- into the estate of the surviving spouse.

When both spouses establish credit bypass Trusts for each others' benefit, under the terms of their Trust instruments, the first credit equivalent amount applicable in the year of death of their estate passes to the Trust. Generally, the Trust provides that all of its income is for the benefit of the surviving spouse, certain distributions of principal are allowed, and upon the surviving spouse's death, the remainder passes to the beneficiary or beneficiaries tax-free.

The operative feature of a Marital Exemption Trust -- and the reason it is not included in the estate of the surviving spouse -- is that it is not considered property of the deceased spouse at the time of his or her death owned outright. Instead, the decedent may have an income interest for life in the Trust established by the other spouse. Let us help you like we’ve helped others by formulating an estate plan and providing you with peace of mind by drafting a Marital Exemption Trust for $899.95.

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