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Q.
How can I plan to avoid federal estate taxes
upon death if my estate is larger than the
exempt amount?
A.
Everyone has a lifetime exemption from
federal estate tax during life or upon death.
During your life, you may make gifts of $11,000
or less per person and not create any taxable
event. If your gift is greater than $11,000,
you may elect to pay a gift tax, or you may
elect to file a gift tax return and utilize part
of your exemption.
If you are married and have more
than the exempt amount, you should not
leave your entire estate to your spouse if you
wish to avoid federal estate tax. Your plan to
avoid tax might look like this:
Husband creates a trust called
“Trust A.” Husband’s trust retains up to the
exempt amount and pays wife income only and also
gives her a right of invasion of $5,000 or 5% of
principal. If husband’s trust has an excess of
the exempt amount, the balance goes to the
surviving spouse outright, using the unlimited
marital deduction. This method allows the
husband to retain his exemption, in addition to
his making maximum use of his unlimited marital
deduction. The wife has the same type of trust
in reverse, and upon the second death, the
husband and wife can now leave twice the exempt
amount tax-free.
1.
First death — deceased person’s trust pays
income only to spouse.
2.
Second death — twice the exempt amount
tax-free to heirs.
The above plan is typically called an A-B trust or
credit shelter trust. I simply call it a double
tax-saving trust. A typical estate plan also
includes wills called pour-over wills to
accompany the trust, durable family powers of
attorney, deed transfers to the trust, living wills
and instructions for final arrangements and personal
effects.
Additional steps can be recommended by
your attorney for tax planning beyond the A-B
exemptions, as needed.
A common mistake is for husband and wife
to leave everything to each other. If this plan is
implemented, the first spouse to die loses his/her
exemption, since the surviving spouse has only one
exemption.
For example, if the surviving spouse
died with an estate worth twice the exempt amount,
the exempt amount could be left tax-free and the
balance would be taxed in the 37% to 55% range. If
you want to preserve your estate for your loved
ones, it is critical that you implement an estate
plan to avoid probate and avoid as much federal tax
as possible. You should seek an attorney who is
competent in estate planning. |
