Preserve
Your Estate for Heirs, Not the IRS
The
movement in Washington to eliminate the federal estate tax may be gaining
ground, but that doesn't erase the fact that the government continues to collect
more than $25 billion a year from the deceased.1
The
top federal estate tax rate dropped by one percentage point this year under
provisions of the 2001 tax law. That's a drop in the bucket considering that the
estate tax could still claim up to 49 percent of taxable estate assets if you
died in 2003. And if the scheduled repeal of federal estate taxes is not made
permanent, the top estate tax rate will return to 55 percent in 2011.2
The estate tax has been described as "voluntary" because there are
ways to help reduce it. If you and your spouse would like to see your heirs
receive as much of your estate as possible, you may want to consider the merits
of a living trust or will with a bypass provision.
Two
Better Than One
When a married couple utilizes a living trust with a bypass provision (also
called an A-B trust), the couple’s assets will be placed in two trusts upon
the death of the first spouse. An amount up to the applicable exemption amount
is placed in Trust B, the deceased spouse’s trust. The remaining assets are
placed in Trust A, the survivor's trust. The surviving spouse can retain control
of Trust A and receive income from both trusts. Upon the death of the surviving
spouse, the assets in Trust B may pass to the couple's heirs free of probate and
federal estate taxes provided that the trust is irrevocable and the surviving
spouse is not considered the owner of the trust. The assets in Trust A pass to
the couple's heirs free of probate and federal estate taxes if they are valued
at less than the spouse's applicable exemption amount in the year of the
spouse's death.3
For married couples, a trust with a bypass provision essentially doubles the
amount of an estate that can be excluded from estate taxes. In 2003, the first
$1 million of an estate is exempt from federal estate taxes (the exemption
eventually reaches $3.5 million in 2009).
When you add together real estate, retirement savings, investments, and other
assets that are part of an estate, the exemption amount can be exhausted
quickly. A properly structured bypass trust may help you reduce or manage estate
taxes and help preserve assets for your heirs.3
1) Internal Revenue Service, 2003
2) Under budget rules of the 2001 tax act, the estate tax is repealed in 2010.
However, unless Congress takes action, the federal estate tax will be reinstated
in 2011.
3) The use of trusts involves a complex web of tax rules and regulations. You
should consider the counsel of an experienced estate planning professional
before implementing such strategies.
© 2003
Emerald Publications
