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Credit Shelter Trusts / Estate Planning Strategies
Back to the Basics - How Can You Save $246,250 on Your Estate Tax Bill
Estate Planner Nov-Dec 1998
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The most basic estate planning can save a couple with combined assets of $1.25 million $246,250 in estate taxes. How can you reap this savings? By taking advantage of both the applicable exclusion amount -- which allows each individual to transfer, either during life or on death, $625,000 of assets estate or gift tax free -- and the marital deduction -- which allows U.S. citizen spouses to transfer unlimited amounts to each other estate and gift tax free.

Case Study: Scott and Jane

Scott and Jane have $1.25 million of assets. If they hold all of those assets in joint tenancy, then on Scott's death, Jane will have $1.25 million of assets. On her death, assuming she still holds all of the assets, her estate will owe $246,250 of estate taxes. Their children would receive only $1,003,750.

If instead Scott and Jane had split their assets during life so that each held $625,000 in his or her own name, then on Scott's death his $625,000 could be held in a nonmarital deduction trust for Jane's benefit. On her death, the assets held in that trust would not be included in her estate for estate tax purposes, but instead would pass to their children tax free. As a result of this planning, Scott and Jane's children receive the full $1.25 million.

Not a Perfect World

In an ideal world, splitting assets between spouses to achieve the desired tax results would not be a problem. But often one spouse has money and the other spouse does not. If you are the monied spouse, you may not want to merely hand over $625,000 of assets to your spouse for a variety of reasons. For example, you may want to ensure the money goes to your children from a previous marriage after your spouse's death.

One way to transfer assets to your spouse while retaining some control is through the use of a lifetime qualified terminable interest property (QTIP) trust. Transfers to certain types of trusts -- including the QTIP trust -- will qualify for the marital deduction, but the trust must meet certain requirements. The primary ones are:

• The beneficiary spouse must receive all trust income at least annually; and
• The spouse can be the only beneficiary during his or her lifetime.
  The trust can also give the spouse the right to receive principal and/or limited testamentary powers of appointment, but neither is required.
  

On your spouse's death, the trust assets will be included for estate tax purposes in his or her estate, as if your spouse owned them directly. Through careful drafting, you can retain control over how trust assets will be distributed after your spouse's death. This might provide the comfort you are looking for while allowing you to maximize the tax benefit. But remember, if you divorce the trust cannot terminate -- once you create your trust, it will forever be held for the benefit of your spouse.

Based on current tax law, the applicable exclusion amount will increase each year until it reaches $1 million in the year 2006. Thus, in 1998, you can establish a lifetime QTIP trust with $625,000. For each year that the applicable exclusion amount is increased, you can add to the trust to ensure that your estate plan always will have the benefit of the full applicable exclusion amount.

Take What's Due

While we cannot allow the tax laws to control how we do things, you can use a lifetime QTIP trust to accomplish your tax objectives while keeping some sense of security.