Protect Your Family With an Estate Plan

Recent changes in the federal estate tax rules have reduced those tax rates and even “abolished” the tax as of a future date. But it’s a mistake to be lulled into a false sense of security. As of early 2006, the estate tax is repealed for only one year (2010), with rates thereafter returning to where they were prior to the passage of the 2001 tax law – as high as 55%! (The estate and gift tax exemption stays at $1 million.) There have been all sorts of proposals in Congress either to abolish the tax permanently, or to lower rates and increase exemptions, but as of now, it’s anyone’s guess as to what will happen.

To put it simply, there is absolutely no good reason to put off developing and implementing an estate and trust plan that will offer your heirs the most protection at the least tax cost.

A tax-saving trust technique

You may be aware that using the “marital deduction” can eliminate any tax on transfers between spouses, but the surviving spouse won’t have the marital deduction to fall back on. He or she will only have the estate and gift tax exemption available.

In other words, the marital deduction may turn out only to delay tax, not eliminate it. That’s why, if your estate is substantial, you will want to consider harnessing the combined power of the marital deduction and exemption with a “marital trust” and “bypass” trust plan in your Revocable Living Trust or Will. Consider this strategy:

You create a bypass trust to receive an amount that does not exceed the estate tax exemption available at your death. You instruct that the income from the bypass trust be paid to your spouse for life. Then, when he or she dies, the trust’s assets pass to the beneficiaries that you name in the trust agreement. (This strategy works especially well if you want to provide for both your current spouse and any children from a prior marriage.) At the same time, you establish a marital trust to receive the assets not transferred to the bypass trust.

With this plan in place, there is no tax at all on your estate at your death. You have successfully used your estate tax exemption and the unlimited marital deduction. As for your spouse’s estate? The assets in the bypass trust are not includable as part of his or her estate and so won’t be taxed. The balance of his or her estate may be taxed, but the exemption available at death may shelter all or much of the assets from taxation. Here are some examples:

Estate Tax Savings with Bypass Trusts

Assumption: First spouse dying in 2006 the second in 2008 when the tax rate on estates will be 45% and no separate assets or appreciation of assets in the survivor's estate.

Note: Are you married to someone who is not a U.S. citizen? If so, special restrictions on the marital deduction may apply. We recommend that you seek professional guidance now. You may be able to craft a trust plan that will keep your marital deduction options open.

Start planning now

The need to arrange for the orderly and tax-efficient transfer of your family’s assets should loom large on your planning horizon. Come speak with us. We’ll inform you of the many wealth preservation strategies and techniques, both basic and sophisticated, that are available to you and your family.

To find out more, please contact us.