Mark Cornwall: The Worst Thing to Happen to Estate Planning

There may not be an estate tax law, but there are planning terms with which you should be familiar

By Mark Cornwall, Noozhawk Columnist | Published on 02.02.2010

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The worst thing that has happened to estate planning so far is that Congress hasn’t replaced the estate tax law of 2010 after deciding to do away with it.

Mark Cornwall
Mark Cornwall

What are we to do? Nothing? There is always the chance that Congress will not get around to — or agree on — a new estate tax law. Then there’s the legal question of whether it can make it retroactive.

I have it from a great resource that if you’re thinking of dying in the near future, this would be the best year. That’s because it still may end up that there will be no estate tax, and this is the only year that wish may come true.

But that only affects the taxed portion of the estate. What about the distribution portion? It’s still useful to go over the rudimentary aspects of a revocable trust when you decide to put your estate in order and make certain the money or assets go where they are intended. Here are simple definitions of planning terms with which you should be familiar.

Pourover Wills

Every revocable trust needs to have a pourover will. A pourover will not only reiterates the last testament of the decedent, but works to “pour” assets into the revocable trust — if they hadn’t already been transferred to the revocable trust before the death of the first spouse.

That would be the case if Ben Cartwright of Bonanza fame failed to transfer ownership of his gun collection into the trust before he died. The pourover will would allow the gun collection to pour into the trust. It could then be distributed to the children — Adam, Hoss and Little Joe — in accordance with the provisions of the pourover will and revocable trust.

The downside in California comes into play if the gun collection has a value of more than $100,000. Then probate would be necessary to transfer the assets into the trust. This is another good reason to update your revocable trust every so often. It makes certain that new acquisitions have been properly funded into the trust.

Survivor’s Trust

Once the revocable trust comes to an end at the time of death, it typically directs the trustee to create two separate trusts. In our example, Ben has died first and his half of the $4 million of community property is going into the bypass trust discussed below.

The other half of the estate, since Ben has “transmuted” his separate property into community property, goes into the surviving spouse’s (Kitty’s) survivor’s trust.

Acting as her own trustee over the survivor’s trust is just like being trustee over your revocable trust. Kitty has complete control over the property in the survivor’s trust, and the trust property avoids probate just like in a revocable trust. The survivor’s trust is administered for the sole benefit of and by Kitty, and she is entitled to every bit of the monetary distribution of its principal and income for life. She can choose whether to share the income of this trust with the three boys.

Bypass Trust

The bypass trust is also known as the “exemption trust” — or the “B trust,” “family trust,” “credit shelter trust” or the “nonmarital trust,” as well as other names. Don’t let this confuse you because there is no need for it. It’s other people who get the A trust and the B trust mixed up. It can be remembered by A, “above” ground like the survivor’s trust, and B, “below” ground like the bypass trust.

All of these names refer to the same trust used to save money from federal estate taxes by properly utilizing the “applicable exemption amount” of the nonmarital tax exemption, which in this past year was $3.5 million. It’s now called nonmarital because it goes into the bypass trust. What goes into the marital tax exemption goes into the survivor’s trust.

There is no estate tax on the increased value of the bypass trust.

— No opinion herein is a “marketed opinion” and no information provided herein can be used to avoid tax penalties for which the taxpayer would otherwise be responsible. Mark S. Cornwall has lived in Santa Barbara for more than 30 years and practiced law here for 25 years. He is accepting new clients. His book, Estate Planning: The Heroes Way for Baby Boomers, can be purchased via his Web site, www.MarkCornwall.com; Amazon.com; or locally at Chaucer’s and Borders bookstores. To schedule an appointment, contact him at .(JavaScript must be enabled to view this email address) or 805.845.7558.

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