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| Estate Tax |
And the exclusion is portable between spouses. Say a hypothetical Jim Johnson dies and leaves everything to his wife, Ann.
All bequests to a spouse who is an American citizen escape estate tax. So Jim's estate doesn't use his $5 million exclusion. Jim's unused $5 million exclusion can pass to Ann. Now Ann has a $10 million exclusion: Jim's plus her own.
So some couples can avoid federal estate tax with little or no planning. They can leave everything to the surviving spouse. If the surviving spouse dies with $10 million or less in assets, no federal estate tax will be due.
But this strategy has limits. These rules lapse after 2012. If no action is taken, the federal estate-tax exclusion will drop to $1 million, with rates on excess assets up to 55%. Few people expect that to happen. For deaths in later years, the law could have a lower exclusion and no portability.
Even under current law, difficulties may arise with "I leave everything to my spouse" plans. You might trigger state estate tax, for instance. Some states have exclusions of $1 million or less.
Say Brad Collins leaves his $1 million estate to wife Diane. She dies with a $2 million estate in a state where the estate tax exclusion is $1 million. So Diane's estate is $1 million over the state limit. Depending on the estate tax rate, her estate could owe $100,000 or more.
In this situation, the Collins family might have been better off if Brad had left his $1 million to a trust.
Fine-Tuning
Properly drafted, such a trust could have given Diane access to the trust fund yet kept those trust assets out of her estate. Then the entire $2 million could have passed to their children, free of state and federal estate tax.
So people who live in states with a low estate-tax exclusion should factor state tax into their planning.
Traditional reasons for establishing trusts still exist, too. For instance, your spouse may not be experienced at handling money.
You may be afraid that he or she will make bad investments or fall prey to greedy relatives. Or your surviving spouse could become incompetent, resulting in poor financial decisions.
If so, you might be well-served by an estate plan that involves trusts. A reliable trustee can keep assets safe for your surviving spouse.
Sources: http://www.investors.com
