Written by Jim Worthington on February 10, 2019

The simplest form of will for a married couple basically says: “I give, devise, and bequeath everything I own to my beloved spouse if my spouse survives me. If my spouse does not survive me, I … .” Estate planning lawyers call this a sweetheart will

In the past, the sweetheart will’s simplicity gave up a great tax-saving opportunity. To understand why, we first look at the amount of the federal estate tax exemption in past years:

         Year           Amount                       Year           Amount

         1997           $600,000                       2009           $3,500,000

         1998           $625,000                       2010           $0 or $5,000,000

         1999           $650,000                       2011           $5,000,000

         2000           $675,000                       2012           $5,120,000

         2001           $675,000                       2013           $5,250,000

         2002           $1,000,000                    2014           $5,340,000

         2003           $1,000,000                    2015           $5,430,000

         2004           $1,500,000                    2016           $5,450,000

         2005           $1,500,000                    2017           $5,490,000

         2006           $2,000,000                    2018           $11,180,000

         2007           $2,000,000                    2019           $11,400,000

         2008           $2,000,000

The next factor to understand before addressing the limits of a sweetheart will is what assets comprise the taxable estate. It basically includes any property a person controls. The obvious suspects include bank accounts, investments, real property, and retirement accounts. A less obvious suspect is life insurance. (There are more complex estate inclusions that are beyond this article’s scope.)

With this information in mind, imagine a married couple with one working spouse and one staying at home in 2000. Suppose they had a home worth $200,000, savings of $50,000, a retirement account for the working spouse of $150,000, life insurance for the working spouse of $750,000, and life insurance for the stay at home spouse of $150,000. Those assets total $1.3 million.

Now, let’s suppose the working spouse died with a sweetheart will in 2000, leaving everything to the survivor. There would be no estate tax at the first spouse’s death because of the marital deduction. If, however, the surviving spouse died in 2001 owning all $1.3 million (including the life insurance on his or her life), $625,000 would be subject to estate tax. That amount is the difference between the $1.3 million of assets less the $675,000 exemption for persons dying in 2001. The federal estate tax on that amount could have been as high as $249,250.

This tax could have been entirely avoided by use of a credit shelter trust in the working spouse’s will. The credit shelter trust would cause the surviving spouse’s assets to look like this:

 Outright to SpouseCredit Shelter Trust
Retirement account$150,000 
Stay at home spouse’s life insurance$150,000 
Working spouse’s life insurance$75,000$675,000

At the surviving spouse’s death in 2001, the assets in his or her name would be less than the $675,000 exemption. The $249,250 of estate tax generated by the sweetheart will would have been avoided. The only drawback is that the assets in the credit shelter trust would not receive a step up in basis at the surviving spouse’s death. In this example, that wouldn’t be a big factor as the change in value between 2000 and 2001 would likely have been fairly small.

As the preceding table shows, the period from 2001 to 2009 saw rapidly increasing exemptions. Our hypothetical couple with $1.3 million in total assets would have had no estate tax problem by 2004. That couple might have really preferred a sweetheart will, because of their love for each other, its simplicity, the importance of obtaining a step up in basis at the second death, or some combination of those factors. Lawyers developed two main planning strategies at that time.

One was a disclaimer trust, which read like a sweetheart will unless the surviving spouse disclaimed assets, in which case a credit shelter-like trust was funded. A disclaimer is a very technical way of saying no thanks to an inheritance so that it passes as if the inheritor predeceased and with the inheritor not being able to direct the ultimate disposition, including by a power of appointment in the disclaimer trust. The other was a Clayton QTIP where the personal representative of the estate of the first spouse to die elected marital deduction treatment for certain assets.

By 2011, however, and even more so in 2018, sweetheart wills came back in vogue. The exemptions were and are so high that very few people need to be concerned with federal estate taxes. In addition, the unused exemption of the first spouse to die (the Deceased Spouse Unused Exemption Amount) is portable to the surviving spouse as long as an estate tax return is filed for the first spouse to die. 

Trusts are still likely to be used now by the following groups:

  • couples where at least one spouse is in a second marriage and wants to provide for both a spouse and children from an earlier marriage,
  • couples with asset protection needs,
  • couples with not yet mature children, and
  • couples with special needs children.

Taxes should never be the proverbial tail that wags the dog. But this article shows that working with a skilled estate planning lawyer is a way to accomplish your non-tax goals in a tax-efficient way.