Credit Shelter Trust Provisions Will Clauses - 5 Clauses (aka By-Pass Trust; aka Unified Credit Trust, aka Exemption Equivalent Trust) (10 Pages)
Although the amount of the exemption from the federal estate tax has varied over the years, planning to take advantage of the full available exemption has always been an essential element of every well-drafted Will. Unlike the marital deduction, however, where there are strict requirements to follow to gain the benefit of the deduction, achieving the use of the exemption equivalent is not difficult – it is a given that it is available in every estate.
5 Clauses Are Included To Address The Following Issues:
CLAUSE 1: Create the Credit Shelter Trust for the Exclusive Benefit of the Surviving Spouse While Alive, with Remainder to Children
CLAUSE 2: Create the Credit Shelter Trust for the Benefit of the Family Group Including the Surviving Spouse and the Children of the Testator – Distributions in the Discretion of the Trustee.
CLAUSE 3: Create the Credit Shelter Share for the Benefit of the Children – Outright if Age 35; Otherwise in Trust until the Children Reach Designated Ages – 3 Increments of Principal Payments.
CLAUSE 4: Create the Credit Shelter Share for the Benefit of the Children – Outright Distributions to Children
CLAUSE 5: Allow the executor to exercise discretion to determine the optimal funding of the marital and credit shelter portions of the estate. The so-called “Clayton Clause”.
Issues: The Credit Shelter Trust Provisions (aka By-Pass Trust; aka Unified Credit Trust, aka Exemption Equivalent Trust)
Although the amount of the exemption from the federal estate tax has varied over the years, planning to take advantage of the full available exemption has always been an essential element of every well-drafted Will. Unlike the marital deduction, however, where there are strict requirements to follow to gain the benefit of the deduction, achieving the use of the exemption equivalent is not difficult – it is a given that it is available in every estate.
The ready availability of the exemption equivalent suggests that there is great latitude and flexibility in drafting for the use of the federal tax exemption. That is in fact the case. What the draftsman needs to consider is how the different beneficiaries of the estate can participate (or not participate) in the provisions of the Will setting aside assets to qualify for the federal estate tax exemption. Among the questions that arise are the following: Should the exemption be made available for the testator’s children alone and if so, outright or in trust? If in trust, at what ages should the interests of the children be distributed to them? Should the surviving spouse be permitted to benefit from the exemption, and if so, should the spouse be the primary (or exclusive) beneficiary while living with children as the remainder beneficiaries, or should there be a pooling of benefits between the spouse and the children, with the trustee given discretion to select income and principal beneficiaries?
A variety of clauses are appropriate to address these issues. One variation benefits the surviving spouse exclusively while living (Clause 1). Another creates a family group of spouse and children, and permits the trustee to exercise discretion in the making of distributions (Clause 2). Another allocates the credit shelter share of the estate plan exclusively for the children – outright if age 35 has been attained, in trust with incremental distributions at ages 25 and 30 if not (Clause 3). Another allocates the credit shelter share of the estate plan exclusively to the children outright (Clause 4). Finally, consider using a clause designed to allow the executor of the decedent’s estate to exercise discretion to achieve maximum flexibility and optimal tax allocation between a marital deduction share (see the discussion in Issue 3, above, and particularly Clause 4), and the credit shelter shares described herein. This clause is sometimes referred to as a “Clayton Clause” after a case that approved its use. (See Clause 5).
RELATED CLE COURSES: Please note: Mr. Siegel's "Introduction To Estate Planning" and "Intermediate-Sized Estate Planning" are currently available on audio CD and DVD at www.nlfcle.com and online at www.nlfonline.com. On both of these web sites, click on your state (or any state if you do not care about earning CLE credits) and scroll down to the respective course titles, both of which appear under the heading "Estate Planning".
Author:
Steven G. Siegel is president of The Siegel Group, a Morristown, New Jersey - based national consulting firm specializing in tax consulting, estate planning and advising family business owners and entrepreneurs. Mr. Siegel holds a BS from Georgetown University, a JD from Harvard Law School and an LLM in Taxation from New York University.
He is the author of several books, including: Planning for An Aging Population; Business Entities: Start to Finish; Taxation of Divorce and Separation; Income Taxation of Estates and Trusts, Preparing the Audit-Proof Federal Estate Tax Return, Putting It Together: Planning Estates for $5 million and Less, Family Business Succession Planning, Business Acquisitions: Representing Buyers and Sellers in the Sale of a Business; Dynasty Trusts; Planning with Intentionally-Defective Grantor Trusts; The Federal Gift Tax: A Comprehensive Analysis; Charitable Remainder Trusts, Grantor Trust Planning: QPRTs, GRATs and SCINs, The Estate Planning Course, The Retirement Planning Course, Retirement Distributions: Estate and Tax Planning Strategies; The Estate Administration Course, Tax Strategies for Closely-Held Businesses, and Tort Litigation Settlements: Tax and Financial Issues.
Mr. Siegel has lectured extensively throughout the United States on tax, business and estate planning topics on behalf of numerous organizations, including National Law Foundation, AICPA, CCH, National Tax Institute, National Society of Accountants, and many others. He has served as an adjunct professor of law at Seton Hall and Rutgers University law schools.
The Siegel Group provides consulting services to accountants, attorneys, financial planners and life insurance professionals to assist them with the tax, estate and business planning and compliance issues confronting their clients. Based in Morristown, New Jersey, the Group has provided services throughout the United States. The Siegel Group does not sell any products. It is an entirely fee-based organization.
Contact the Siegel Group through its president, Steven G. Siegel, e-mail: [email protected].