Estate Tax Planning

estate tax planning

Under current law, Federal Estate taxes are imposed on estates in excess of $11.8 million.  The State of Maryland imposes an estate tax on estates in excess of $5 million. (For husband and wife these exemptions are “portable,” which means that the second spouse to die can utilize the unused exemption of the first spouse to die.)  In addition, there is a 10% inheritance tax on the value of property that passes to anyone other than a close relative (spouse, child, grandchild, parent, grandparent or sibling). There are estate tax planning techniques that can be used to avoid or minimize these taxes, but they must be done before death.

Simple Bypass Trust

If you’re married and have significant assets, the use of a simple bypass trust will allow you and your spouse to each take full advantage of the estate tax credit. For example, married couples typically make the mistake of having simple wills which leave all property outright to the surviving spouse.

Simple Wills

Simple wills cause all of the property owned by a married couple to end up in the surviving spouse’s estate. This is bad tax planning because the surviving spouse only gets the benefit of his or her own tax credit. The surviving spouse is usually not permitted to use the decedent spouse’s tax credit, even though none of it may have been used. This can result is a large estate tax, sometimes hundreds of thousands of dollars, being due on the death of the surviving spouse when the property is passed to the children or other heirs.

Credit Shelter Trust

The estate tax laws, however, permit married persons to shelter the first spouse’s property from the estate tax through the use of a trust and still allow the surviving spouse to have some control and benefit from the property. This sort of trust is generally referred to as a “credit shelter trust,” and it may be created in a properly drafted will or trust. A credit shelter trust generally provides that the surviving spouse receives all of the income produced by the property of the trust. The surviving spouse may also receive property of the trust for specified reasons, such as health, maintenance, and support. When that spouse dies, all of the property held by the credit shelter trust may ultimately pass to the children of the decedent free of the estate tax because it is covered by the first spouse’s tax credit. In addition, he or she may pass an additional amount of property free of the estate tax to the extent of the tax credit.

Find out how Kathy can help you better understand estate taxes with a free consultation.

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