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 of dollars.
An example will highlight the problem. Let's assume you and your spouse have a $4,000,000 estate in 2006. If you die tomorrow leaving everything to your spouse, your spouse will have a $4,000,000 estate at her death. In 2006, your spouse can shelter $2,000,000 of her $4,000,000 estate from estate taxes with her Estate Tax Exemption Amount* but cannot use your Estate Tax Exemption Amount to shelter the remainder. As a result, there would be an estate tax of $920,000 imposed at her death assuming she died later the same year, even after using her Estate Tax Exemption Amount*. With proper planning, both of you could have utilized your Estate Tax Exemption Amounts* and transferred your entire estate 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 credit shelter trust) will contain as much of the first spouse to die's assets that can pass free of estate taxes ($2,000,000 in 2006-2008) and the balance of his 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 credit shelter trust for the health, education, support and maintenance costs of herself and children. Additionally, the survivor can be given unlimited access to all income from the assets held in the credit shelter trust. Upon the survivor's death, the credit shelter 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.
* The federal estate tax exemption amount is $2,000,000 in 2006 increasing to $3,500,000 in 2009. The highest federal estate tax rate is 46% in 2006 and decreases to 45% in 2007-2009. 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%. Currently, bills are pending in Congress that, if passed, would permanently repeal or otherwise lessen the impact of the federal estate tax.
The concepts contained herein are not intended to serve as advice and may have legal, tax and accounting implications. Consult your Attorney and CPA for advice.
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