by Glenn M. Wall, Attorney at Law


            The Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA, purports to repeal the “death” tax (or, technically, the estate tax).  Here are the pertinent provisions of that law:


            During the taxable years 2002 and 2003, the unified credit--the estate value below which no estate tax is assessed-- was $1,000,000.  That amount rose in 2004 and 2005 to $1,500,000; thence it increased to $2,000,000 in years 2006-2008; and to $3,500,000 in 2009.  On January 1, 2010, the estate tax is repealed; however, please make sure you die before December 31, 2010, because, unless Congress acts before then, the estate tax will be reinstated in 2011 with a unified credit of $1,000,000. 


            EGTRRA presents distinct challenges in the estate planning area, notwithstanding the fact that Congress will likely enact legislation prior to 2010 to repeal the estate tax repeal, while settling on a unified credit amount palatable to both Democrats and Republicans.[1] Regardless of what Congress decides to do, this means you should continue to plan for the estate tax for the foreseeable future, comforted only by the fact that most of us, unlike under prior law, will either never have to worry about it, or, with proper tax planning, will be able to shelter most of our estates from the taxman.


            In any event, basic strategies to avoid or minimize estate taxes remain the same.  The first and most important strategy is to have in place a Last Will and Testament incorporating a “bypass” trust to utilize the unified credit in the estate of the first spouse to die.  Here’s how this works:


            Assume a husband with assets totaling $4,000,000 dies in 2007 and leaves his entire estate to his wife.  As under former law, there will be no estate tax assessed on his estate because of what is called the “unlimited marital deduction,” which, as the name implies, allows spouses to transfer any amount of property, by Will or by gift, free of either estate or gift tax.   By leaving his entire estate to his wife, however, the husband has forfeited his $2,000,000 unified credit, because outright bequests to one’s spouse do not qualify for any tax break except the marital deduction. Should the wife, who is now worth $4,000,000, die later the same year, she will leave behind a taxable estate of $2,000,000 after deducting the unified credit amount.  This estate will then be taxed at confiscatory rates topping out at 48%.


            The problem facing our taxpayers, then, is how to utilize both the unlimited marital deduction and the unified credit in the husband’s estate.  The solution is really quite simple and can be illustrated in basic terms by our husband directing in his Will that the unified credit equivalent be left to someone other than his wife: let’s say the children. By doing this, the $2,000,000 going to the wife is sheltered from estate tax by the marital deduction and the same amount going to the children will be spared tax based on the husband’s unified credit.  Net result: $4,000,000 escapes taxation.


            The above scenario, however, is rarely used for the obvious reason that it divests the surviving spouse of the enjoyment and benefit of the total estate, a result contrary to the normal desire of most couples to provide for the surviving spouse.  In order to carry out this desire, then, the husband’s Will should leave the unified credit equivalent not to the children, but to a “bypass” trust.  A bequest to a trust obtains the same result as before, allowing the husband to utilize the unified credit against his total estate for the bequest to trust and allowing the remaining $2,000,000 to go to the wife.  The difference is that the trust is required to pay the income generated by it to the surviving spouse for the rest of her life (and can pay any or all of the principal to her if the trustee deems it necessary for the wife’s “health, education, maintenance, and welfare”).  The result, of course, is that the wife derives the benefit of the entire $4,000,000 estate while sheltering that amount completely from the estate tax.


Glenn M. Wall is an attorney in Suwanee, Georgia. He has helped clients with planning estates, drafting wills, and creating powers of attorney since 1985.

[1] Which was accomplished in December 2010, with the unified credit increased to $5,000,000.00.