Traditional estate tax planning often includes funding a credit shelter trust (also known as a bypass trust or family trust) up to the amount of a decedent’s unused estate tax exemption, then funding any assets in excess of the exemption amount into a marital trust for the benefit of the decedent’s surviving spouse. This type of planning was appropriate for many married couples who wished to maximize their remaining estate tax exemptions while leaving most assets for the support of a surviving spouse and deferring or avoiding estate taxation under the unlimited marital deduction.
With wealth transfer tax exemptions at historical highs (in 2023, the gift and estate tax exemption is $12.92 million—$25.84 million per married couple), income tax planning is an increasingly important part of trust-based estate plans. This is particularly true when dealing with income tax-deferred retirement plans. Accordingly, beneficiary deemed owner trust (BDOT) provisions can lead to meaningful tax savings when applied appropriately within retirement trusts.
When the federal estate tax exemption is high, the issue of how to apportion death taxes is of less concern to many families. But this issue can cause controversy with taxable estates, blended families, and certain types of assets. If the decedent’s will or trust is silent on the issue of tax apportionment or the decedent died intestate, state law provides default rules that determine which interests or assets in a decedent’s estate bear the burden of paying death taxes. If a certain interest is insufficient to pay the net tax attributable to property passing under the terms of the trust, state law often also provides an order of priority for payment of the balance of the tax owed. However, the terms of the decedent’s will or trust can override these rules; that is, everyone has the opportunity to direct how taxes (and expenses, for that matter) will be paid. In a taxable estate, this may be the most important provision in the testamentary instrument.