In a previous blog, “An Estate Plan to Protect Your Children,” we discussed the importance of including a guardianship provision and trusts for children under the wills of parents. In addition to protecting their children, married couples also need to protect their assets.
Wills
In New York State, if a couple is married without children and have no wills in place, upon the death of the first spouse, by law the surviving spouse will receive the entire estate of the deceased spouse. If a couple is married with children and have no wills in place, upon the death of the first spouse, by law the surviving spouse will receive the first $50,000 plus one-half of the remaining value of the estate of the deceased spouse. The other one-half will pass in equal shares to the deceased spouse’s children. If an individual has no spouse, has children, and does not have a will, then the individual’s entire estate will pass in equal shares to their children. If the individual has no spouse, has no children, and does not have a will, upon death, the individual’s entire estate will pass to the individual’s parents or, if none, to the individual’s siblings. If a married couple with children wants all of their assets to pass to each other upon the death of the first spouse, it is imperative that they have wills in place leaving their assets to their spouse.
If the balance of the estate of the first spouse to die passes to the surviving spouse, no federal or New York State estate taxes will be owed because the “marital deduction” applies. However, if the value of the estate of the surviving spouse exceeds either the federal or New York State estate tax exemption amounts in place at the time of the surviving spouse’s death, estate taxes will be owed. The current federal exemption amount is $12,920,000, which is scheduled to be reduced to approximately $7,100,000 in January 2026. The current New York State exemption amount is $6,580,000. If estate taxes are due upon the death of the surviving spouse, a lower amount will pass to children or other beneficiaries.
Credit Shelter Trusts
To protect their estate from estate taxes, a spouse with significant assets, high earning potential, or both should include a credit shelter trust under their will for the benefit of the surviving spouse. A credit shelter trust may be set up either (i) as a trust that is mandatorily funded to ensure that it is created and funded or (ii) as a disclaimer trust. If it is clear that a trust for the surviving spouse will be necessary (e.g., to protect assets from estate tax), then the credit shelter trust that is mandatorily funded may be the best option. Unlike a disclaimer trust, under a credit shelter trust that is mandatorily funded, the surviving spouse may have a limited power of appointment to change the disposition to children and other beneficiaries in the event that circumstances change. A credit shelter trust that is mandatorily funded may also be preferred by a spouse with significant assets and children from a prior marriage. If that spouse dies first and a credit shelter trust is set up for the surviving spouse, upon the death of the surviving spouse, the assets in the credit shelter trust will pass to the children of the spouse who dies first. This structure ensures the children or other beneficiaries of the spouse who dies first are not disinherited. If a married couple’s assets are below or on the threshold of the federal and state estate tax exemption amounts, or if the couple is concerned about requiring assets to pass into a trust and prefer to allow the surviving spouse to decide whether the trust will be created, then a disclaimer trust is the best option.
A will with a disclaimer trust leaves the entire balance of the deceased spouse’s estate outright to the surviving spouse but allows the surviving spouse to renounce all or a portion of the balance of the estate. In this case, instead of passing outright to the spouse, the disclaimed portion passes to a trust for the surviving spouse’s benefit. To renounce, the surviving spouse must file a renunciation in the surrogate’s court in the county where the deceased spouse resided. The renunciation must be filed within nine months of the date of death of the first spouse.
Under the credit shelter trust, the surviving spouse is able to receive income and principal (i) as needed to provide for health, education, maintenance, and support (HEMS) or (ii) in the total discretion of a disinterested co-trustee. The credit shelter trust can also give the spouse a so-called “five and five power,” which allows the spouse to withdraw the greater of $5,000 or 5 percent of the trust principal each year. Any assets held by the trust will not be includable in the surviving spouse’s taxable estate (except to the extent of the five and five power). Given the uncertainty as to what the federal or New York State exemption amounts will be when a person dies or what the size of a person’s estate will be, credit shelter trusts that are set up as disclaimer trusts allow young married couples who may accumulate wealth in the future flexibility to minimize estate tax. A credit shelter trust can also benefit the couple’s children or other beneficiaries. Any assets passing to a credit shelter trust that must be funded, or disclaimed into a disclaimer trust, will not be included in the surviving spouse’s taxable estate. As a result, depending on the size of the surviving spouse’s estate, there may be little or no estate taxes owed on the surviving spouse’s death.
Note that if a couple decides to set up a mandatorily funded credit shelter trust, their wills should also provide that the value of their assets that exceed the estate tax exemption pass outright to each other or into a “marital trust” for the benefit of the surviving spouse. This excess value will be protected from estate tax by the marital deduction. Generally, we design a couple’s wills to ensure there is no state or federal estate tax payable on the death of the first spouse. Accordingly, estate tax, if any, would be payable on the death of the second spouse. On the death of the first spouse, in addition to handling the administration of the estate of the first spouse, as part of estate planning for the surviving spouse, we recommend strategies to minimize or avoid estate tax at the surviving spouse’s level.
Recommendations
All individuals, regardless of marital status, should have wills in place to avoid the default distribution plan under New York State law. Each spouse in a married couple with significant assets or high earning potential should consider including a credit shelter trust (and potentially a marital trust) under their will for the benefit of the surviving spouse. Depending upon a couple’s or individual’s circumstances, we may also recommend they have revocable trusts, irrevocable trusts, and other estate planning vehicles to best accomplish their objectives.
If you have any questions regarding the content of this blog, please contact Heather Levine-Levy, counsel, at hlevine-levy@barclaydamon.com, or another member of the firm’s Trusts & Estates Practice Area.