Elections Under Trust
In those situations where the descendent has established one or more Trusts, the surviving spouse will be the sole beneficiary of the Marital Trust and will likely be one of the beneficiaries of a Credit Shelter Trust. Therefore, a complete understanding of the elections available under the Trusts and an appreciation of the effects of each election are extremely important.
If a Marital Trust has been established, the surviving spouse's access to the assets in the Trust can range from unrestricted access to the principal in the Trust to an income interest only (as in a Q‑TIP, or Qualified Terminal Interest Property Trust). If any access is permitted to the assets, the surviving spouse must determine to what extent to exercise that right. An asset withdrawal will result in a reduction of income from the Marital Trust. To the extent the assets are withdrawn and retained by the surviving spouse, the responsibility for asset management will thereby fall to the surviving spouse. If only limited access is permitted to the assets in a Q‑TIP Marital Trust, the issues are similar to those to be considered for a withdrawal from a Credit Shelter Trust. For a withdrawal from a Marital Trust, the surviving spouse must assess the level of income needed and the need for additional principal to offset any shortfall in income. These determinations must be made on a current as well as on a projected basis. However, it is important to bear in mind that the assets in a Marital Trust are included in the surviving spouse's estate in any event. Therefore, a withdrawal from a Marital Trust will not affect the size of the surviving spouse's estate. To the contrary, assets held in a Credit Shelter Trust are not included in the surviving spouse's estate. If such assets are withdrawn or distributed from such a Trust, the surviving spouse's estate will be increased and the value of assets distributed free of estate tax will be reduced.
Some elections, such as the ability to withdraw from a trust the greater of 5% of the principal or $5,000, are annual elections. If they are not made currently, they lapse. If an election is made to exercise the right to withdraw assets from a Credit Shelter Trust, the surviving spouse's estate, and the resulting estate tax, may increase. On the other hand, the failure to make an election in prior years may result in current withdrawals being insufficient to support the surviving spouse thereby resulting in the surviving spouse being dependent on the trustee's discretion to receive sufficient funds on which to live. Therefore, planning is very important to determine the level of assets that are necessary to be withdrawn in order to minimize the estate tax ramifications, while at the same time assuring the availability of a sufficient level of income and assets.
Very often, some discretion lies with the Trustee, whether in the distribution of income, in order to allow for income tax planning, or in the distribution of principal, in order to allow for the principal of a Credit Shelter Trust to be kept out of the surviving spouse's estate. Regardless of the portion of the Trust, the Trustee discretion is extremely important, for the surviving spouse to work well with the Trustee. The surviving spouse should be aware of the information needed when a request for a distribution is made and that information should be provided in the required format each time such a request is made.