We all want to protect our family from financial hardship after our death. Most married individuals believe they can best protect their family by leaving everything they own outright to their spouse. If you share this belief, your good intentions could cost your family hundreds of thousands, if not millions, of dollars.
For example, assume you and your spouse have a combined $8,000,000 estate in 2009. If you die tomorrow and leave everything to your spouse without taking advantage of your estate tax exemption amount, your spouse will have an $8,000,000 estate at his or her death. Assuming your spouse also dies in 2009, your spouse can shelter $3,500,000 of his or her $8,000,000 estate from estate taxes with his or her estate tax exemption amount.1 However, your spouse cannot use your estate tax exemption amount to shelter the remainder. As a result, there would be an estate tax of $2,025,0002 imposed at his or her death assuming he or she died later the same year. With proper planning, both you and your spouse can use your estate tax exemption amounts and transfer both estates to your heirs free of estate taxes.
The key is to establish a will or trust that will divide your assets into two subtrusts upon the first spouse's death so that each of you fully utilize your estate tax exemption amount. This type of arrangement is commonly referred to as an A/B Trust.
The typical A/B Trust works as follows. One trust (commonly referred to as a B-Trust) will contain as much of the first spouse to die's assets that can pass free of estate taxes ($3,500,000 in 2009). The balance of his or her assets and the survivor's assets will be held in a survivor's trust. The survivor will have unlimited access to the assets held by the survivor's trust and can use the B-Trust for costs related to health, education, support and maintenance. Additionally, the survivor can be given unlimited access to all income from the assets held in the B-Trust. Upon the survivor's death, the credit B-Trust will pass to the next generation free of estate taxes. The survivor's estate tax exemption amount will be applied to the assets held in the survivor's trust so that a portion (or all) of the survivor's trust will also pass to the next generation free of estate taxes.
With basic planning, you can provide your family with financial stability and maximize the estate tax savings available to you.
1 The federal estate tax exemption amount is $3,500,000 in 2009. The highest federal estate tax rate is 45% in 2009. The federal estate tax will be repealed on 1/1/10 until 12/31/10. Beginning 2011, the federal estate tax will be reinstated with a federal estate tax exemption amount of $1,000,000 and a maximum estate tax rate of 55%. Congress continues to discuss and consider legislation that, if passed, could change the estate tax exemption and estate tax rates for 2010 and beyond.
2 The calculations were obtained using NumberCruncher software, Leimberg & LeClaire, Inc., assuming a 45% federal estate tax rate in 2009.
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This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
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