In any year, assets passing from a decedent to his or her surviving spouse do so tax-free because of the unlimited marital deduction. The potential tax consequences come into play when the survivor eventually dies.
A common estate planning strategy is for the predeceasing spouse to leave the most assets possible in a bypass trust for the use of the surviving spouse and children, and avoid taxation at the surviving spouse’s death. Thus, in 2009, the typical plan would leave $3.5 million to the bypass trust and the remainder to the surviving spouse. However, several states have passed legislation that overrides these estate plans if enacted prior to 2010. In these states, 2009 law is applied to someone dying in 2010. Maryland is one such state.
Take, for example, Bob and Mary, a couple who reside in Maryland and who have a net worth of $100 million, all of which is Bob’s property. Bob passes away in 2010. Since Maryland law applies 2009 law to Bob’s estate plan, the greatest amount that can pass tax-free to a bypass trust is $3.5 million, with $96.5 million passing outright to Mary. This $96.5 will be taxed in Mary’s estate if Mary dies in 2011 or later, resulting in a potential multi-million dollar tax bill.
Contrast this with the situation of Bill and Jane, a couple who live just across the state line in Delaware (which has not enacted an override provision), and who also have a net worth of $100 million, all owned by Bill. Bill also passes away this year. Since Bill’s estate is not subject to a state law override, the entire $100 million of Bill’s assets can be transferred into a bypass trust for Jane’s use. The result is that the $100 million Bill leaves will be free from tax at the time of Jane’s death, regardless of the year in which she passes away. A stark contrast, isn’t it?
What alternative does Bob have to avoid this result? He could move to a state like Delaware that does not have the override law. However, there is a simpler method. He can restate his estate plan in 2010. The state override laws only override plans that were drafted prior to 2010. So, by restating the plan in 2010, the override law would become inapplicable. The result: if Bob dies in 2010, the $96.5 million would not get thrown into Mary’s taxable estate at her later death. Under current law, if Mary dies after 2010 with a taxable estate of $96.5 million, her estate would incur a tax of $52,729,200. Thus, by restating his estate, Bob will save his children more than $52 million in taxes on their mother’s estate! Whatever fee Bob’s estate planning attorney charges, it’ll be a bargain for Bob and his family.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd., Suite 240
San Diego, CA 92124