Credit Shelter Bequests

While the marital deduction under the estate and gift tax excludes from your federal taxable estate only the value of property transferred to your spouse, the "unified credit" (now called the "applicable credit amount") serves to exclude from estate taxation lifetime gifts and transfers at death of up to $2 million for those who die in 2006 through 2008 and up to $3.5 million for those who die in 2009. This exclusion from estate taxation applies regardless of who receives the gifts and transfers.

Under current law, the estate tax will be repealed for one year in 2010 and, in 2011, the estate tax is scheduled to be reinstated with the unified credit set at an amount that will only provide an exclusion of $1 million from the federal taxable estate. Congress is expected to act during 2009 to change the estate tax laws and prevent their repeal.

Especially if the value of your estate is greater than the applicable exclusion amount, you can take advantage of the unified credit to transfer some of your assets to persons other than your spouse, because, if you give everything to your spouse, he or she will not be able to use the marital deduction to exclude any amount from his or her federal taxable estate after your death. Consider the following example.

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Joe More, who is married to Ida More, dies in 2007 with a gross estate of $2.5 million. His will used a credit shelter bequest to transfer $2 million to the couple's only child, Sam, with the remaining $500,000 going to Ida. The $500,000 transfer to Ida, which effectively provides for her continuing needs, is not subject to tax and, because of the marital deduction, reduces the taxable estate to $2 million. Because in 2007 the unified credit offsets the estate tax on up to $2 million of gifts and transfers, the entire bequest to Sam is tax free. And, if Ida dies in 2008, her will can then transfer the $500,000 to Sam tax free utilizing the unified credit. Thus, no estate tax liability is incurred by either Joe or Ida.

Joe could have transferred the whole $2.5 million to Ida tax free because of the marital deduction, but, at the time of her death in 2008, she would then have transferred to Sam the entire $2.5 million. Because her bequest to Sam would then exceed the $2 million exclusion due to the unified credit, the amount in excess of $2 million ($500,000) would be subject to estate tax at a rate of 45%. Thus, in this example, Joe's use of the shelter credit bequest saves Ida $225,000 in estate taxes and allows for their son to receive all of their estate, without reduction for taxes.

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Credit Shelter Bequests

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