A Common Estate Tax Reduction Strategy

October 16, 2010
300px US Capitol dome Jan 2006 A Common Estate Tax Reduction Strategy

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Much of the motivation behind many estate planning strategies is to simply avoid as much in estate taxes as possible.  We only have a couple months left of freedom from federal estate taxes, as they are pretty much assured to return in some form by January 1, 2011.

Most of us do not need to be immediately concerned about this, as many predict that Congress will eventually settle on an exemption on each individual’s first $3.5 million.  However, this is still not a certainty.  If Congress cannot agree by January 1, the exemption will automatically revert to $1 million.  As we have discussed before in this post, it is certainly that the total value of your home, life insurance and retirement assets will reach $1 million at some point.

If you are concerned with a potential estate tax bill, take heed.  With help from your estate planning attorney, you can end up saving your joint estate amounts totaling upwards of hundreds of thousands of dollars.

How?  Through a common estate planning technique that involves the use of the “Unlimited Marital Deduction” and a “Credit Shelter Trust” (aka “A-B Trust” and “Bypass Trust”).  Under this plan, when the first spouse dies, his estate is split into two parts:

1.       Bypass Trust – $1 million (or whatever the exemption amount is) goes directly into the Bypass Trust, which is set up for the benefit of your children.  The survivor will be entitled to income from this trust during his or her life, along with the ability to take from the $1 million principal under very limited circumstances and amounts.

2.       Marital Deduction Assets – The remaining assets are given to the surviving spouse, since under the unlimited marital deduction, any property given to a spouse is exempt from estate taxes.  You can opt to give these assets to the survivor in the following common ways:

  • Outright – The survivor is simply given the remainder outright and will have complete freedom over these funds.  This could be disadvantageous if, for instance, the survivor remarries, and he or she could end up leaving all of these funds to the new spouse, thereby disinheriting your kids.
  • QTIP Trust – “QTIP” stands for “qualified terminable interest property”.  As opposed to an outright gift, this kind of trust allows the first spouse to determine to whom these assets will ultimately end up while still paying the survivor the trust income.  Typically, QTIP trusts are created in both spouses’ wills to ensure their plan succeeds no matter which one dies first.
  • Power of Appointment Trust – The survivor is given a “power of appointment”, which means that she can specify the ultimate beneficiaries.  All income is required to be paid to the survivor.
  • Estate Trust – This is similar to the Power of Appointment Trust, except that the survivor can choose to let income accumulate within the trust.

At death, the survivor’s estate also gets the benefit of the estate tax exemption on the first $1 million ((or whatever the exemption amount is).  Additionally, any funds in the Bypass Trust will be exempt from estate tax as well (under the theory that the assets were already exposed to potential taxation after the first death).

In essence, using both spouses’ estate tax exemptions in this way can help you save significant amounts of money for your heirs.

 A Common Estate Tax Reduction Strategy
 A Common Estate Tax Reduction Strategy


Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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