When planning your estate, you will probably be interested in every possible way that you can reduce or avoid federal estate taxes. One tool that many people suggest using is a trust. Not all trusts are created equal, though. Some won’t help you in that area at all.
What is the Federal Estate Tax?
The federal government imposes a tax on the transfer of your assets when you pass away. Your “estate” refers to everything you own or have certain interests in when you pass away. The tax is calculated from the sum total of your assets.
Many individuals do not need to worry about federal estate taxes, as they do not apply to transfers of estates under $5 million. Under recent legislation, married couples can jointly transfer more than $10 million dollars without taxation. Essentially, this law allows spouses to combine their personal exemption (currently roughly $5.4 million each). This tax break is called the portability provision.
But if the value of your estate exceeds this amount, or if you are looking to protect your assets from creditors and others, it is important to know what estate planning tools can help – and which can’t.
Living Trusts Do Not Reduce Estate Taxes
One of the most important things to know is that a standard living trust does not serve the purpose of reducing federal estate taxes. These types of trusts are mainly created for the purpose of avoiding probate, and are still considered part of your estate.
Because you can access or revoke the assets within the trust at any time, they are still considered to be under your control. Thus, like your bank accounts and other property, they fall under the title of your “estate.”
However, there are more complicated types of trusts that can be used to reduce your taxes if your estate exceeds the federal minimum.
A Tax Avoiding AB Trust May Help
One possibility for your estate may be to set up an “AB trust.” Under an AB trust, instead of leaving property to each other, both spouses put their property in an irrevocable trust.
When one spouse passes away, the surviving spouse may continue to receive income from the property within the trust. In some circumstances they may have limited access to the trust’s principal, but for the most part, assets within the AB trust cannot be accessed.
The children will inherit the assets within the trust after the surviving spouse dies. Since both spouses surrendered their assets to the AB trust, the assets therein were not technically owned by the surviving spouse.
Because of this, AB trust assets are not part of the estate, and are not subject to the federal estate tax.
Though AB trust can be a powerful asset protection tool, they are not without their drawbacks. Some of the negative elements of AB trusts are:
- The trust will severely restrict you or your spouse’s access to your assets.
- The irrevocable trust will require a tax ID number, and an annual tax return must be filed for the trust
- The surviving spouse will need to keep separate records for the irrevocable trust assets
- Federal estate tax laws are often adjusted or modified by Congress, and you may later want to change or revoke your trust in the coming years.
What’s Right for You? Consult with an Estate Planning Attorney
There are a number of ways to protect your assets from estate tax. Your best bet is to consult with a knowledgeable estate planning attorney. He or she will be able to tailor an estate plan to your unique needs and ensure that your assets are protected and you pay the lowest taxes possible.
About the Author:
Christopher Q. Wintter is the founder of Wintter & Associates, P.A. and a board-certified expert in Trust and Estate matters by the Florida Bar. With more than 24 years’ experience as a practicing attorney, he also serves as an instructor and faculty member for the National Institute of Trial Advocacy (NITA)—the nation’s leading provider of legal advocacy skills training to practicing attorneys—and has earned the AV® Preeminent™ rating with LexisNexis Martindale Hubbell. He was also selected for inclusion in Florida Super Lawyers for 2011 and 2012 in Estate and Trust Litigation.