Many of our married clients have Wills (or a Revocable Trust) that leave a portion of each spouse's estate (equal to the amount needed to reduce to zero the federal estate tax under the law prior to 2010) to a Marital Trust (for the sole benefit of his/her spouse) and the balance (the unused portion of his/her unified credit exemption amount ($3.5 million for 2009)) to a Bypass Trust. This division is generally done with a "formula" which simply funds the Bypass Trust with the maximum amount that will result in no estate tax on the first spouse's death. With the repeal of the estate tax for 2010, under the formula, all the decedent's estate would be transferred to the Bypass Trust.
While many different provisions may govern distributions from a Bypass Trust, for some estate plans the surviving spouse is not a beneficiary of the Bypass Trust, particularly if the surviving spouse will be adequately provided for under the pre-2010 law Marital Trust. With such a formula provision, however, if one spouse dies in 2010, all the spouse's estate will be distributed to the Bypass Trust so that the surviving spouse is not provided for out of the decedent's property.
If you have any questions or would like to further discuss the effect of the estate tax repeal for 2010 on your estate plan and the partial reintroduction of carryover income tax basis rules, please contact us.