Specific Directives Explanatory
– Marital Trust "B" Funding Mandate –

Co-grantor MLCP trusts provide for “Credit Shelter” and “Qualified Terminable Interest Property (QTIP) Trust formats.  The Credit Shelter Trust – also referred to as Trust “B” in your MLCP co-grantor trust – is to be funded with the estate of the first spouse/settlor to die within 9 months of death.  The primary purpose of funding Trust “B” with the value of the trust estate legally belonging to the first settlor to die is to avoid the decedent settlor’s estate being bundled in the surviving settlor’s estate for transfer tax purposes upon the surviving settlor’s decease.  However, that is not as much of a concern for most Americans now as it was years ago because the value of the federal transfer-tax exemption equivalent amount under today’s laws has been raised to a fairly high level (exceeding $5 million).

The funding of Trust “B” with the trust estate of the first settlor to die, whether or not it is necessary for the avoidance of transfer tax, may eventually require additional trust administrative work such as (a) the procurement of a federal tax ID number, (b) the annual filing of a fiduciary tax return [Form 1041] if there is “taxable income” earned from Trust “B” [regardless if it is distributed out or retained in trust], and (c) the potential of additional fiduciary record keeping and reporting.  Therefore, families with modest estates having children of only the same/one marriage, and with simple estate planning goals, very often prefer that the trust estate of the first spouse/settlor to die simply be transferred over to, and be aggregated with, Trust “A” – the trust estate of the surviving settlor – for simplistic administrative purposes.

To that end, your MLCP co-grantor trust file provides here a Specific Trust Directives "App" that, when used, does NOT require the funding of Trust “B” unless the aggregate estate value of both settlors exceeds one-half of the value of the federal exemption equivalent amount then available at the time of the death of the first settlor to die.  However, it is to be clearly understood that the funding of Trust “B” can provide important benefits for modest estates not otherwise needing the estate tax planning modules (Trusts “A” & “B”) that may necessary in leveraging estate tax savings for larger estates.

Non-tax related benefits of mandatory Trust “B” funding include making available a level of control for the decedent settlor (first settlor to die) concerning his/her trust estate.  That is so because Trust “B” becomes irrevocable (not subject to change) upon the first settlor’s decease even though the surviving settlor can enjoy a level of benefit from Trust “B” (income & limited principal distributions).  Therefore the terms of allocation/distribution in force at the time of decease of the first settlor to die shall apply concerning the assets of Trust “B” and cannot be changed by the surviving settlor.

Another non-tax related benefit of Trust “B” funding is that the trust estate value of the first settlor to die will not be exposed to any potential creditors of the surviving settlor.  If everything belonged to Trust “A” – the surviving settlor’s trust estate – and therefore under the full control of the surviving settlor then the undesirable effect will be that the assets of the first settlor to die would be available for satisfying a potential legal judgement or creditor claim against the surviving settlor.

If the prospects of adverse creditor claims of the surviving settlor and/or the loss of control concerning the trust estate of the first settlor to die are a concern then this App should not be used.

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