Federal tax law allows an unlimited transfer of property to a surviving spouse without imposing any estate tax. This is a result of what is called the "unlimited marital deduction." In addition to the unlimited marital deduction, Federal tax law allows every individual to transfer a specific amount tax-free during his or her lifetime, or at death, to a beneficiary or beneficiaries other than a spouse. This amount, called the "exemption equivalent amount" or "unified credit amount," is currently scheduled to increase through the year 2009. In 2010, the federal estate tax is scheduled to be completely phased out, only to be re-instated the following year with the exemption back down to $1,000,000. The current unified credit amount and the scheduled increases through 2011 are shown in the table below.

Year	Exempt Amount
2008	$2,000,000
2009	$3,500,000
2010	unlimited
2011& beyond	$1,000,000

Accordingly, if you are married and you leave everything to your spouse upon your death, your estate will not have to pay any estate taxes due to the effect of the unlimited marital deduction. However, upon the death of your spouse, all amounts in excess of the unified credit amount will be subject to Estate Tax at rates starting at 37%. The highest taxable rate is 55% for the year 2001, 50% for 2002, and then is reduced by one percentage point per year until 2007 when it hits 45%. For example, let's assume you and your spouse have a combined taxable estate of $1,500,000 (note that your taxable estate included everything you own or have control over - including life insurance proceeds -- at the time of your death). If you were to die in the year 2002 leaving everything to your spouse, no estate taxes would be due at that time. If your spouse then were to die in the year 2003, the first $1,000,000 would pass free of Estate Tax, but the remaining $500,000 would be fully subject to Estate Tax. This is because your estate's Unified Credit was lost when you left everything to your surviving spouse under the unlimited marital deduction.

The way to avoid or minimize this tax problem for most married couples is to establish an estate plan so that upon the death of the first spouse a "Credit Shelter Trust" (also called a "ByPass Trust") is created. Typically, the purpose of the Credit Shelter Trust ("CST") is to provide support for the surviving spouse during his or her lifetime, with the remainder of the trust then going to the children upon the death of the surviving spouse. Because the children are the ultimate beneficiaries of the CST, the amount going into the CST is able to qualify for the Unified Credit. Using the above example, upon your death your estate would be left to a CST instead of directly to your spouse. Your spouse could be the trustee of the CST and would be allowed to receive all the income from the CST and five percent or five thousand dollars from the principal of the CST every year. Your spouse can even withdraw additional principal from the CST so long is the money withdrawn is not used by your spouse to exceed the standard of living established while you were alive.

Your spouse's rights in the CST may be written to terminate in the event your spouse becomes remarried after your death. Upon the death of your spouse, the CST will terminate and whatever is left in the CST will go to your children -- completely free of Estate Tax, even if the amount they receive has grown to be more than went in there at the time of your death..

If you are interested in a Credit Shelter Trust, more details can be discussed at your first appointment.

For Additional Information:

What is Probate?
Why Most People Want to Avoid Probate
What is a Revocable Living Trust?
How Does a Revocable Trust Avoid Probate?
What About Irrevocable Living Trusts?
Choosing a Trustee
Estate Planning Glossary