Q. How can I plan to avoid federal estate taxes upon death if my estate is larger than the exempt amount?
A. Everyone has a lifetime exemption from federal estate tax during life or upon death. During your life, you may make gifts of $11,000 or less per person and not create any taxable event. If your gift is greater than $11,000, you may elect to pay a gift tax, or you may elect to file a gift tax return and utilize part of your exemption.
If you are married and have more than the exempt amount, you should not leave your entire estate to your spouse if you wish to avoid federal estate tax. Your plan to avoid tax might look like this:
Husband creates a trust called “Trust A.” Husband’s trust retains up to the exempt amount and pays wife income only and also gives her a right of invasion of $5,000 or 5% of principal. If husband’s trust has an excess of the exempt amount, the balance goes to the surviving spouse outright, using the unlimited marital deduction. This method allows the husband to retain his exemption, in addition to his making maximum use of his unlimited marital deduction. The wife has the same type of trust in reverse, and upon the second death, the husband and wife can now leave twice the exempt amount tax-free.
|TRUST A||TRUST B|
|Exempt Amount||Exempt Amount|
- First death — deceased person’s trust pays income only to spouse.
- Second death — twice the exempt amount tax-free to heirs.
The above plan is typically called an A-B trust or credit shelter trust. I simply call it a double tax-saving trust. A typical estate plan also includes wills called pour-over wills to accompany the trust, durable family powers of attorney, deed transfers to the trust, living wills and instructions for final arrangements and personal effects.