Financial Learning Center
- Basic Estate Planning Documents
- Estate and Gift Taxes
- State Death Taxes and Gift Tax
- Estate Planning Strategies
- Taxation of Your Retirement Plan Assets
If your estate is over the Applicable Exclusion Amount, you will need to do some estate planning to ensure that your estate plan takes advantage of the applicable credit of each spouse. Strategies to consider include using a bypass trust, re-titling of assets, or both. There are also other planning tools to consider, such as a gifting program, life insurance trust, a charitable trust or a qualified personal residence trust.
IMPORTANT NOTE: Even if your estate is not currently over the Applicable Exclusion Amount, realize that it may grow to a taxable size through inflation, increased income, receipt of a windfall (for example, winning the lottery, or getting an inheritance), or some combination of these possibilities. Monitor your estate plan to make sure it reflects your current wishes and your current estate.
Saving Taxes as a Married Couple: Using a Bypass Trust
If you follow the estate plan that most married couples do, you will not pay federal estate tax when you die (assuming you die first and your spouse is a U.S. citizen). As discussed earlier, you are allowed an unlimited marital deduction for assets passed to your spouse. But what happens if your spouse's estate is over the Applicable Exclusion Amount when he or she dies? Unless he or she remarries, he or she will not be able to use the marital deduction. Unfortunately, you were not able to pass along your unused applicable credit when you died.
The way around this problem is to use your applicable credit at your death. Consider leaving a certain amount directly to your children or other loved ones, up to the Applicable Exclusion Amount. If you feel your spouse will need the money or the income it generates to lead a comfortable and happy life, then you may create a bypass trust (also known as a credit shelter trust). In this situation, a trust is created (and typically funded up to the Applicable Exclusion Amount) whereby the trustee (the person you choose to supervise the assets) pays the trust income directly to your surviving spouse. In the event he or she needs extra money, the trust can supply this support subject to certain restrictions. Whatever is left over goes to your children or other family members when your spouse dies. The trust corpus is included in the first spouse's estate, but the applicable credit amount is available to offset the tax. The trust is excluded from the surviving spouse's estate. As in the case of all trusts, you should consult with an attorney or estate planning professional for guidance.
Estate Planning Techniques
Here are nine estate planning techniques that can help you minimize your potential estate taxes and administration expenses, thereby increasing your family's overall wealth:
- Consider establishing a program to gift assets to your children and/or grandchildren using the annual exclusion amount as part of your strategy.
- Evaluate making a current taxable gift to your children and/or grandchildren and pay gift tax. You may be removing future appreciation from your estate.
- Consider using a bypass (credit-shelter) trust to fully utilize the applicable credit available to each spouse.
- Evaluate establishing an irrevocable life insurance trust.
- Review the ownership of property held by you and your spouse. Both you and your spouse should have enough assets titled in your own names to implement strategies that allow full use of the applicable credit available at the first spouse's death.
- Evaluate establishing a qualified personal residence trust (QPRT). This is a means of removing your residence from your estate.
- Evaluate establishing a living trust to avoid probate and to minimize the costs involved in administering your estate.
- Evaluate leaving qualified retirement plan assets to charity.
- Evaluate establishing a family limited partnership to make gifts to your children and grandchildren at a reduced transfer tax cost.
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