By Beth A. McDaniel

 

 

One of the most stressful, if not the most stressful, life altering events an individual can experience is the death of a spouse. Aside from obvious impacts, there can be some not so obvious impacts:

• I think of the woman who was frustrated as Comcast would not allow her to put the ownership of the account I her sole name as she did not know answer to a ‘secret question,’ the name of her husband’s childhood best friend.
• The shock of a client when her bank abruptly cancelled her only credit card, which had initially been established under her late husband’s social security number.
• The insensitivity encountered by a client when she informed her property casualty carrier of her husband’s death to be chirpily told the company’s representative, ‘there goes your married couple’s discount.’

One stress a survivor spouse may encounter is post-death estate tax planning. If the couple had a wellthought-out estate plan, their documents were likely structured to grant each spouse an opportunity for a $2.193 million exemption. How this occurs will depend upon how the documents were drafted. Typically, the estate planning document will state everything goes to the survivor spouse who then has a nine-month window in which to disclaim or relinquish their interest in certain assets. Following this, the assets are retitled into a trust (often referred to as a ‘credit trust’ or ‘bypass trust’) established for the survivor spouse’s benefit.

 

To fund such a trust, it’s essential to determine the value of the assets as of the date of the first spouse’s passing. This involves obtaining appraisals for real estate and ascertaining the account balances or financial asset values of the first spouse’s date of death. Using these valuations, the survivor spouse collaborates with their attorney, CPA, and often their financial advisor to best decide what should be disclaimed into the credit trust. Typically, the survivor spouse serves as the Trustee of the credit trust, which has its own tax identification number. The survivor spouse typically receives all income generated by the credit trust and, if needed, principal to maintain their lifestyle. Upon the survivor spouse’s passing, the assets of the credit trust are not included in their taxable estate.

 

Another method to structure a credit trust is through specific language in the deceased spouse’s Will or a revocable living trust, This language dictates that states upon the first spouse’s passing, one-half of the community property and all the deceased spouse’s separate property will be used to fund the credit trust. Here, it is still important to determine the value of the assets as of the first death as this determines the new cost basis. If the deceased spouse’s assets are greater than $2.193 million, the credit trust will be limited to that amount, or the survivor spouse may opt to pay taxes on it to keep it out of their taxable estate.

 

An important note is that although the assets of the credit trust will not be included in the survivor spouse’s taxable estate, the tax basis for the assets in the credit trust will be what the assets were worth upon the deceased spouse’s date of death. 

 

If you would like resources regarding what steps to take when a death occurs, or if you have questions regarding a special needs trusts or any other estate planning related topics, please contact our client care specialist, Margo Passeau, directly at (425) 296-3121 or by e-mail at margo@bethmcdaniel.com.

 

First Published: November 2023