Tax Credit Trusts
Current tax law allows any individual to pass $2 million to their heirs without the estate being subject to federal estate taxes. This figure is slate to increase to $3.5 million in 2009. But what happens if your estate is greater than $2 million? Federal estate tax rates range from 18% to 46% on amount that exceed the $2 million exemption.
A Tax Credit Trust is one of the first tools families employ to eliminate estate tax liability. Sometimes called an A-B Trust, this tool can effectively double the estate tax exclusion amount for married couples. Here's how it works.
Each person can utilize the $2 million estate tax exclusion, so a married couple have up to $2 million each they can pass to their heirs without federal estate taxes. If you don't use it you loose it. Many couple have simple "I love you" wills that pass all assets directly to the surviving spouse in the event of death. This puts all the assets into the estate of the surviving spouse and relinquishes the estate tax exclusion of the first spouse to die.
What the tax credit trust can do is to receive up to the maximum federal exclusion amount keeping these assets out of the estate of the surviving spouse. The trust is usually set up to pass all income to the surviving spouse, and the surviving spouse can even invade the principle if needed. However because the assets never become a part of the surviving spouses estate they pass to the next heirs in line with no estate taxes due upon the death of the last spouse, and the last spouse still has their $2 million exclusion to pass without taxes also. So with just a little planning couple can pass $4 million to their heirs without triggering any federal estate tax bill.
Many individuals mistakenly believe they will not have a problem, but remember life insurance proceeds, family business interests, and real estate holdings are all part of your taxable estate. Another pitfall is making sure each spouse has enough assets to fully fund their tax credit trust. If a husband owns a business and is heavily insured it is easy to find assets to fund his trust with, but what about his wife. You should look at correctly titling your assets to avoid problems like this. The risks are high enough that you should seek competent counsel to be sure you make the right decisions.
A Tax Credit Trust is one of the first tools families employ to eliminate estate tax liability. Sometimes called an A-B Trust, this tool can effectively double the estate tax exclusion amount for married couples. Here's how it works.
Each person can utilize the $2 million estate tax exclusion, so a married couple have up to $2 million each they can pass to their heirs without federal estate taxes. If you don't use it you loose it. Many couple have simple "I love you" wills that pass all assets directly to the surviving spouse in the event of death. This puts all the assets into the estate of the surviving spouse and relinquishes the estate tax exclusion of the first spouse to die.
What the tax credit trust can do is to receive up to the maximum federal exclusion amount keeping these assets out of the estate of the surviving spouse. The trust is usually set up to pass all income to the surviving spouse, and the surviving spouse can even invade the principle if needed. However because the assets never become a part of the surviving spouses estate they pass to the next heirs in line with no estate taxes due upon the death of the last spouse, and the last spouse still has their $2 million exclusion to pass without taxes also. So with just a little planning couple can pass $4 million to their heirs without triggering any federal estate tax bill.
Many individuals mistakenly believe they will not have a problem, but remember life insurance proceeds, family business interests, and real estate holdings are all part of your taxable estate. Another pitfall is making sure each spouse has enough assets to fully fund their tax credit trust. If a husband owns a business and is heavily insured it is easy to find assets to fund his trust with, but what about his wife. You should look at correctly titling your assets to avoid problems like this. The risks are high enough that you should seek competent counsel to be sure you make the right decisions.
technorati tags:Finance, Tax Credit Trust, financial planning
Labels: estate planning, trusts
posted by Joe Taylor at 11:55 AM
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