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Estate Taxes

Will my estate be subject to death taxes?

What is my taxable estate?

What is the unlimited marital deduction?

What is a Credit Shelter, Bypass, or A/B Trust, and how does it work?





Q: Will my estate be subject to death taxes?

There are two types of death taxes that you should be concerned about:  the federal estate tax and state estate taxes.  The federal estate tax is computed as a percentage of your net estate.  Your net taxable estate is comprised of all assets you own or control minus certain deductions.  Such deductions can be for administrative expenses such as funeral and burial costs as well as charitable donations.  Federal estate tax laws were updated in 2013 as part of the American Taxpayer Relief Act which provides for an exemption of $5.25 million.  This means that each individual can transfer up to $5.25 million in assets free of federal estate taxes.   The federal estate tax exemption, also referred to as applicable exclusion amount is adjusted annually for inflation.  

Even if you believe that that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes.  Further, you may have a taxable estate in the future as your assets appreciate in value.  You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account changes in the tax laws as well as shifts in your individual circumstances.


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Q: What is my taxable estate?

Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies - minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.


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Q: What is the unlimited marital deduction?

The federal government allows every married individual to give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes.  In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because at the death of the surviving spouse, all assets in the estate over the applicable exclusion amount will be included in the survivor's taxable estate.  It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.


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Q: What is a Credit Shelter, Bypass, or A/B Trust, and how does it work?

A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax.  

Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of federal estate taxes and without using up any of his or her estate tax exemption. However, for individuals with substantial assets, the Unlimited Marital Deduction does not eliminate estate taxes, but simply works to delay them.  This is because when the second spouse dies with an estate worth more than the exemption amount, his or her estate is then subject to estate tax on the amount exceeding the exemption.  Meanwhile, the first spouse's estate tax credit was unused and, in effect, wasted.  The purpose of a Credit Shelter Trust is to prevent this scenario. 

Upon the death of the first spouse, the Credit Shelter Trust establishes a separate, irrevocable trust with the deceased spouse's share of the trust's assets. The surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest.  This irrevocable trust is funded to the extent of the first spouse's exemption. Thus, the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse, and the trust takes full advantage of the first spouse's estate tax credit.  Special language in the trust provides limited control of the trust assets to the surviving spouse which prevents the assets in that trust from becoming subject to federal estate taxation, even if the value of the trust goes on to exceed the exemption amount by the time the surviving spouse dies.


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