A planning strategy for married couples to minimize estate taxes…
It’s easy to let fun summer activities distract us from business and responsibility, but for some families, taking a moment to focus on this very important issue could significantly impact your financial legacy.
Married couples have an unlimited deduction to shelter assets from federal estate tax passing to a surviving spouse (American). Each individual also has federal estate tax exclusion (currently $2 million) to shelter assets passing to a non-spouse. Unfortunately, a simple will directing assets to your surviving spouse will waste the estate tax exclusion of the first-to-die (due to the unlimited marital deduction) and potentially overfunding the estate of the surviving spouse. Estate taxes currently run as high as 45% so an effective estate plan could make a substantial difference in the value of your legacy.
Let’s look at an example of a Mr. and Mrs. Smith with a combined $3 million estate. Mr. Smith dies in 2008 and leaves his portion of the estate to his loving wife. Mrs. Smith claims the unlimited marital deduction eliminating any current federal estate taxes. Mrs. Smith now has a $3 million estate and she dies a few months later. Her children use her $2 million federal estate tax exclusion but this leaves $1 million exposed to federal estate tax. They now must write a very large check to the IRS. How could this have been avoided?
What if Mr. and Mrs. Smith left direction in their will or living trust to fund a bypass trust at the death of the first-to-die to the extent of the federal estate exclusion? Since Mr. Smith died in 2008, the bypass trust was funded with $2 million sheltered by his federal estate tax exclusion. Mrs. Smith is the beneficiary of the trust so she is entitled to receive income from the trust and may even receive principal if needed for support and maintenance. When Mrs. Smith dies a few months later, the assets in the trust pass to the children without federal estate tax and her $1 million estate is sheltered by her federal estate tax exclusion. The entire estate is passed to the children without any federal estate tax due. (This example does not consider the effect of state estate tax)
The federal estate tax exclusion is scheduled to increase to $3.5 million in 2009 and disappear in 2010. As the law stands now, in 2011 the exclusion will revert to $1 million and the top estate tax rate will increase to 55%. If your marital estate exceeds the federal estate tax exclusion, you should consult your financial and legal advisors to see if a bypass trust makes sense for you.
Christopher S. Laws, CFPÒ
100 North Point Center East
Suite 530
Alpharetta, GA 30022
(770) 995-7101
Securities offered through LPL Financial ● Member FINRA/SIPC
