Preserve the Massachusetts Exclusion Amount of Your Spouse With a Marital Deduction Trust

A husband and wife each have their own exclusion amounts that can shelter their estates from Federal and state estate taxation.The federal estate tax exemption amount is portable, meaning that a surviving spouse and use the deceased spouse's unused exemption. But in Massachusetts if one spouse dies before estate tax planning steps are taken, and the couple has assets worth more than $1 million, the couple may end up wasting a valuable exemption amount.

This happens when a married couple relies on Massachusetts tax rules that allow a person to leave any amount to their spouse free of estate tax. When the estate is worth more than $1 million, the unlimited marital deduction simply postpones the estate tax. When the second spouse dies, his or her estate will include both spouse's assets, and there will be only a single exemption amount. This can result in a Massachusetts estate tax that could have been easily avoided with a bypass trust.

The A - B trust strategy uses the two exclusion amounts. Upon the death of the first spouse, the marital trust receives the marital deduction amount for use by the surviving spouse.

The second trust, the family trust, receives the rest of the estate. Assets up to the federal estate tax exemption amount can be left to any non-spouse beneficiary in the family trust, and there will be no estate tax on the estate of the first spouse to die.

Then, if the amount remaining in the marital trust is less than the surviving spouse's exemption amount, there will be no estate tax due upon the death of the surviving spouse. The two trusts can be funded in several ways:

  • assets can be passed from the decedent's will to either of the trusts
  • assets can be moved into a Living Trust during the lifetime of the couple, and the Living Trust can direct some assets to the marital and family trusts upon death of the first spouse
  • assets that pass to the surviving spouse can be disclaimed by the surviving spouse, and then directed into the family trust based on directions in the decedent's Will.

    Other features can be added to:
    • protect the eligibility of another family member who receives government benefits;
    • schedule distributions from the ILIT for a beneficiary who needs money for college tuition, graduation, or down payment for a home;
    • give flexibility that allows for distributions of money if a beneficiary starts a business, gets married, has a child or for other special needs that you designate.

Using the two trust approach, the couple can reduce or eliminate federal and Massachusetts estate taxes that would otherwise be due upon death of the second spouse. The wording of the Trust or Will determines how assets are directed. There are three types of clauses that can be considered:

  • Formula Clause: The formula clause is used because the exclusion amount may change before the death of the first spouse. The formula can be used to describe the amount directed to the marital trust. Example: "The amount that will reduce the federal and Massachusetts estate tax to zero, or the lowest possible amount."
  • Pecuniary Clause: a specific dollar amount. Example: An amount equal in value to ..."
  • Hybrid: a combination of pecuniary amounts and fractional share formula that may specify a percentage of assets and/or specific assets.

If you're married, and you have assets worth more than $1 million, we can create these trusts for you and your spouse. A bypass trust allows you and your spouse to take advantage of the federal and Massachusetts estate-tax exemptions, and pass your assets to your children or other beneficiaries without the burden of estate taxes.