Introduction

Estate plans for most individuals include Wills that require the Executor to create one or more specialized trusts upon the testator's death. For married couples, each spouse's Will commonly provides a "Family Trust" to utilize the estate tax exemption of the first spouse to die and, for larger estates, a "Marital Trust" to defer estate tax on the first spouse's death. The diagram shown below illustrates this type of plan. To achieve the tax savings and other benefits provided by this arrangement, it is imperative that these trusts be implemented timely and administered properly following the first spouse's death.  

Although the following discussion addresses trusts created under Wills (sometimes known as "testamentary trusts"), similar requirements apply to estate plans that employ a Revocable Living Trust instead of Wills.

The Family Trust

Most Wills for married couples include provisions for the creation of a Family Trust upon the death of the first spouse. The Family Trust will be funded with assets owned by the deceased spouse in an amount up to the deceased spouse's exemption from estate tax (currently $2,000,000, and $3,500,000 beginning January 1, 2009). The primary purposes of the Family Trust are: (1) to shelter assets, including future growth, from estate tax (for this reason, this trust is sometimes known as a "Bypass Trust" or a "Credit Shelter Trust"); and (2) to protect assets from the claims of the surviving spouse's creditors.

The Marital Trust

Wills for couples with larger estates also usually require the Executor to create a Marital Trust upon the death of the first spouse. Like the Family Trust, the Marital Trust will be funded with assets owned by the deceased spouse, but only to the extent the deceased spouse's assets exceed his or her exemption from estate tax.  While the Marital Trust is designed to provide the deceased spouse's estate with an estate tax marital deduction, the assets of the Marital Trust, like the Family Trust, are not subject to the claims of the surviving spouse's creditors.  

Implementing the Estate Plan

In most cases, after the Will has been admitted to probate and the Executor has been formally appointed, the estate plan provided under the Will is implemented by gathering information, determining allocable assets, calculating amounts allocable to the Family Trust and the Marital Trust, making asset allocation decisions, and documenting the allocation.

To begin the implementation process, a detailed listing and date-of-death valuation must be compiled for all of the decedent's property and debts, as well as estate administration expenses. If a Form 706 Federal Estate Tax Return is filed, it will commonly be the best source of this information. Otherwise, an accurate inventory filed as part of the probate of the Will should provide at least part of the necessary information.

Further, all of the decedent's estate planning documents in effect on the date of death must be gathered and reviewed. Such documents will necessarily include the Will and any related Codicils, governing trust agreements and amendments, if applicable, as well as beneficiary designation documents for certain assets. 

To effectively allocate assets among the various trusts created under the Will, the Executor must determine the nature and extent of property that will be taken into account.  As a general rule, the Will only controls the division of probate assets.  For this reason, so called "non-probate assets", such as life insurance and retirement accounts, are not disposed of by the Will, and therefore are not generally considered when creating and funding the trusts created under the Will.

Utilizing the pool of allocable assets, the Executor will then calculate the "target amounts" for asset allocations to the Family Trust and the Marital Trust. For this purpose, the terms of the Will must be reviewed to determine the marital deduction formula and the funding formula that must be followed. Applying these provisions to the allocable assets, the Executor will calculate the dollar value of assets to be allocated to each trust.  

Once the target amounts for allocations to the Family Trust and the Marital Trust are calculated, the Executor will decide which particular assets are allocated to each trust. Because the Family Trust and the Marital Trust have dramatically different tax characteristics, certain types of assets are better suited for one trust or the other. Due to the planning opportunities presented by this particular step, it is wise for the Executor's CPA, attorney, and financial advisor to all be consulted during this process.

To achieve the goals of the estate plan, it is imperative that the asset allocation decisions be documented and properly implemented by having each asset titled in the name of the Family Trust or the Marital Trust. Moreover, each trust will likely be required to file its own income tax return, beginning with the tax year during which it is established and funded, so the participation of the Executor's CPA in this process is very helpful. 

Consequences of Failing to Timely Implement the Estate Plan 

Executors who fail to take the steps outlined above to fully and timely implement the estate plan provided by the Will put the estate, and themselves, at risk for the following potentially disastrous results:

• Unnecessary estate tax on the second spouse's death if the first spouse's estate tax exemption is lost because the Family Trust is not properly established and administered.
• Unnecessary estate tax (and penalties & interest) on the first spouse's death if the Marital Trust is not properly established and administered.
• Loss of creditor protection for the surviving spouse that otherwise could have been provided by the Family Trust and the Marital Trust.

Conclusion

When the Executor has fulfilled his or her fiduciary duty of properly implementing the estate plan, the tax and non-tax goals of the testator are more likely to be achieved and substantial benefits provided for the surviving spouse and other beneficiaries. We have the experience and expertise not only to identify planning opportunities when constructing an estate plan, we also are able to assist the Executor with all facets of this process, in cooperation with the Executor's other professional advisors.