Why is this Topic Important to Wealth Managers? This blogticle represents part four of five in a series on the unified estate and gift tax as well as the portability of the spousal credit. Most wealth managers are aware of the new changes to the federal estate and gift tax structure with the unification and increased exemption amount of five million dollars. This week we discuss the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.
Generally the purpose of a bypass trust is to fully utilize a deceased spouse’s exclusion amount which is now also accomplished by the statutory DSUEA. Thus, there is no need to preserve the first spouse’s exclusion amount since the surviving spouse’s estate will be able to utilize the first spouse’s exclusion amount without use of a trust. In short, the bypass trust is no longer usually necessary for estate tax purposes.
Both the DSUEA and bypass trust will fully utilize the first-spouse-to-die’s exclusion amount, so why not use an A-B trust arrangement? After all, Congress could eliminate the DSUEA in 2012 as easily as it introduced it in 2010. The A-B trusts are the marital deduction trust (A), and the credit shelter trust (B).
Yet there is a very good reason to think twice before using a bypass trust in 2011 and 2012 (and in later years if the DSUEA concept sticks around). Assets of the first spouse to die that are placed in a bypass trust do not receive a step-up in basis at the death of the second spouse; however, assets that pass untaxed in the second spouse’s estate due to the first spouse’s DSUEA will receive a step-up in basis, which can result in a very significant income tax savings when beneficiaries of the surviving spouse’s estate sell property received from that estate.
Although use of a bypass trust in 2011 and 2012 is unnecessary—and even counterproductive— for estate tax purposes, existing bypass trusts do not necessarily need to be eliminated from the estate plan. Estate tax “certainty” extends only through 2012, and the DSUEA may disappear when the next Congress takes its turn with the estate tax. If the DSUEA is eliminated, the bypass trust will again become an important tool for estate planning.
Rather than remove the bypass trust from the will, the trust can be dealt with if the testator dies in 2011 or 2012 through the use of disclaimers. If the standard A-B trust arrangement is kept in place while the DSUEA is in effect, and the surviving spouse is named as residual beneficiary of the trust, the gift to the bypass trust can be disclaimed and the surviving spouse will take the property. Then, at the surviving spouse’s death, the DSUEA component of the last-to-die spouse’s exclusion amount will capture the first-to-die spouse’s unused exclusion amount.
Importantly, beneficiaries will receive property covered by the DSUEA with a stepped-up basis, unlike property received from a bypass trust. 
Under the new estate tax regime, the estate’s applicable exclusion amount is equal to the basic exclusion amount plus the DSUEA. More specifically, the Tax Relief Act of 2010 sets the DSUEA for a surviving spouse of a deceased spouse dying after December 31, 2010, as the lesser of: (A) the basic exclusion amount, or (B) the excess of – (i) the basic exclusion amount of the last such deceased spouse of such surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under IRC Section 2001(b)(1) on the estate such deceased spouse.
In sum, the DSUEA is “portable” in nature, meaning that it allows a surviving spouse to utilize his or her deceased spouse’s applicable unused exclusion amount. It is also important to note that the portability feature does is not apply to the unused GST tax exemptions of a pre-deceased spouse.
Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
Robert Bloink, Esq., LLM & Professor William H. Byrnes, Esq., LL.M., CWM, Selected Provisions and Analysis of the Tax Relief Act of 2010
, 8, The National Underwriter Company (2011).
 IRC Sec. 2010(c).
 TRA of 2010 § 303(a)(4). See also IRC Sec. 2010(c)(4).
 TRA 2011 §303(a).
 U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in the 111th Congress, 554 (JCS-2-11). Text from: Committee Reports. Available at: http://www.jct.gov/publications.html?func=showdown&id=3777 (last accessed April 6, 2011).