Number 2 Reason For Living Trusts: Reduce or Eliminate Estate Taxes
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Ed Note: Older adults have planned many aspects of retirement, but failed to create an estate plan. Explore how living trusts can reduce estate taxes.
By Michael P. Pancheri, Esq.
Many people say that a revocable living trust doesn’t save estate taxes. Technically, they’re right. There are no provisions in the federal tax laws that exempt revocable living trusts from estate taxes. However, living trusts are often used by individuals and families to take advantage of certain deductions and credits that are allowed under the tax laws.
That sounds like double talk, but let me explain. For individuals dying this year (2009), up to $3,500,000 is exempt from federal estate taxes. This exempt amount is made possible by virtue of a so-called “unified credit.” In addition to the unified credit, all property passing to a surviving spouse is exempt from federal estate taxes by virtue of a so-called marital deduction. This “marital deduction” is unlimited, so you can transfer any amount of money to your spouse without paying any estate taxes.
Here’s what typically happens when a husband and wife have simple wills. Let’s assume that you (the "husband") and your wife each have $3,000,000 estates. Let’s also assume that you die first and that all your property is left to your wife. Your estate will not pay any estate taxes because of the unlimited marital deduction. Upon your wife’s subsequent death, her estate would pay a federal estate tax of roughly $1,150,000. That's because her unified credit would shelter only $3,500,000 from the federal estate tax. The remainder of her property ($2,500,000) would be taxed at graduated rates reaching 45%.
You can eliminate this $1,150,000 estate tax very easily with a revocable living trust. Let’s assume, for example, that you give your wife only $500,000 upon your death and you put the rest of your property ( $2,500,000) in a revocable living trust. In that case, no federal estate taxes will be paid upon your death because (a) the property given to your wife ($500,000) is exempt from federal estate taxes under the marital deduction and (b) the property held in your revocable living trust ($2,500,000) is exempt from federal estate taxes under your unified credit. By doing that, your wife’s estate will be worth only $3,500,000 after your death (i.e., her original $3,000,000 plus the $500,000 you give her). Upon her subsequent death, her estate will pay no federal estate taxes because the entire $3,500,000 is exempt from such taxes by virtue of her unified credit. The $2,500,000 in your revocable living trust will not be taxed in your wife’s estate because she doesn’t own it, even though she is the preferred beneficiary and could receive distributions if needed. After all is said and done, your children will receive $2,500,000 from your living trust and $3,500,000 from your wife's estate, for a total of $6,000,000.
This very simple but highly effective technique - made possible by the use of a revocable living trust - would eliminate roughly $1,150,000 in federal estate taxes in the above example. For this reason, any married couple with a combined estate in excess of the unified credit (currently $3,500,000) should consider a revocable living trust to take advantage of this tax-saving technique.
Link to the series:
Number 1 Reason For Living Trusts: Protect Property for Beneficiaries
Number 2 Reason For Living Trusts: Reduce or Eliminate Estate Taxes
Number 3 Reason For Living Trusts: Managing Property upon Incapacity
Number 4 Reason For Living Trusts: Avoid Probate
Number 5 Reason For Living Trusts: Avoiding a Will Contest
Number 6 Reason For Living Trusts: Secure Your Privacy
Attorney Michael P. Pancheri is the founder and CEO of the Living Trust Network. You may contact him by email at info@livingtrustnetwork.com. You may also contact him at the Living Trust Network's web site at http://www.livingtrustnetwork.com
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