The Who, What, When, Where, Why and How of Basic Estate Tax Planning for Married Couples WHY plan? Married couples are in a unique position when it comes to planning for the Federal Estate Tax. On the one hand, a married couple may avail themselves of the unlimited marital deduction. This means that a person may transfer upon death an unlimited amount to a surviving spouse (provided they are a U.S. citizen) without paying any estate tax. Sounds great, right!? Not so fast. While no tax is due when the first spouse dies, under the "everything outright to my spouse" (i.e. "I Love You") plan, all assets are piled into, and taxed, in the survivor's estate. While all assets are piled into the survivor's estate, the unused tax exemption of the first spouse is not. The media sometimes erroneously reports that the estate tax exemption is $3.5 million for an individual and $7 million for a married couple. That is not necessarily the case. That is only the case when proactive estate tax planning, as discussed on this page, is put into place. Think of the exemption like a coupon -- under current law you have a coupon that allows you to transfer at your death $3,500,000 worth of assets to anyone you want without paying estate tax. But that coupon expires with you when you die. If you don't use it, you lose it. By transferring everything to a surviving spouse, the $3,500,000 coupon goes unused and is essentially forfeited. Proper planning for the estate tax, as described below, can allow a couple to effectively pass double the exempt amount (currently $7,500,000), rather than a single exempt amount as under the typical plan. The difference in total estate taxes when $3.5 million (plus growth between deaths) is included in the survivor's estate can easily be over $1,600,000 in additional estate taxes paid by your ultimate beneficiaries. This is tax that can be saved by doing estate tax planning that has been successfully used by families for many years. WHO should consider estate tax planning? Married couples whose combined gross estates exceed, or is likely to exceed, a single exemption amount (currently $3,500,000) are candidates to consider tax planning to cash in the coupon. Take special note of the term "gross estate". As is explained further here, the gross estate generally includes all assets that a decedent had any interest in at death --including life insurance proceeds, retirement accounts and most jointly owned property. Add everything up for both spouses and if it exceeds, or may exceed, the applicable exemption, further planning may be warranted. Keep in the mind that the exemption amount is a moving target and a political football. It was $2,000,000 in 2006-2008, in 2009 it is $3,500,000, unlimited exemption in 2010 and then it plummets back down to $ 1,000,000 in 2011. Read more here about the 2001 Tax Act and stay tuned for changes in the law. WHEN should I do the planning? The Federal Estate Tax is a well-crafted tax. It is set up in many ways to penalize the natural procrastination that people often have when it comes to estate planning. In order to utilize both spouse's exemptions, the plan must be created and put into place while both spouses are alive and competent. HOW does the basic plan work? The key component is for the predeceasing spouse to leave assets (in an amount up to, but no more than the exemption amount) in such a way so that those assets will not be taxed in the survivor's estate. Or, as it is often phrased, in a way that will "bypass" the survivor's taxable estate. This can be accomplished in a number of ways. In the most common scenario where an "I Love You" plan has been in place, assets (up to the exempt amount) can be left to a trust in which the surviving spouse is a beneficiary, but also in which the surviving spouse lacks the necessary control to have the trust taxed in the survivor's estate. This type of trust commonly goes by a number of names - B Trust, Credit Shelter Trust, Bypass Trust, Exempt Trust, and Family Trust. Note that while the survivor can be a beneficiary of the credit shelter trust, if structured properly, it is not taxed in his/her estate. Under a "maximum benefit" type credit shelter trust, among other significant powers and rights, the surviving spouse can have the ability to: 1. Receive all of the income from the trust; and 2. Receive distributions of principal based on an "ascertainable standard". The ascertainable standard is defined by the trust and IRS code, but in its simplest terms, assets can be available to a surviving spouse to meet emergencies and to maintain a standard of living should other assets be insufficient to meet those needs. Note that a surviving spouse does not have to be given these maximum benefits in the credit shelter trust and there are often important reasons to alter rights to income and principal and other powers. WHAT other options or considerations are there? To avoid tax at the first death, the credit shelter trust will only be funded with assets up to, but not more than, the exempt amount. Any excess assets will pass in a separate trust in a manner designed so that they will qualify for the unlimited marital deduction. This trust is commonly known as the "A Trust", Spousal Trust or Marital Trust. To qualify for the marital deduction, the Marital Trust must meet two main requirements: (1) the surviving spouse must receive all income from the trust; and (2) only the surviving spouse can be a beneficiary during his/her lifetime. These are minimum rights that the survivor must be given (for when this type of trust, commonly known as a QTIP Trust, may be appropriate please read Special Trust Solution #2 here). On the other end of the spectrum, the survivor may be given any type of additional rights in the Marital Trust, including the right to an outright distribution or withdrawal at any time. Non-tax considerations also play an important role in every estate plan. The details of how the Family Trust and Marital Trust are structured, both during the life of the surviving spouse and after the survivor's death, should be tailored to each individual's needs and wishes. WHERE do I get started? You should start by consulting a qualified estate planning attorney. Estate tax planning can be complicated, but it doesn't usually have to be. We have a number of different methods for explaining how to plan for estate taxes and the variations and specifications that can be drawn into the plan to meet your needs. To make an appointment for a free initial estate planning consultation, please call us at (847) 991-2250.
Copyright © 2006-2009 Law Offices of Robert H. Glorch. All Rights Reserved.
Disclaimer: All content provided is brief general information and not intended as legal advice. Always consult an attorney before acting. Please read full disclaimer at the bottom of the page. |
