Estate Tax Planning
The Marital Deduction
Under current law, spouses can leave each other an unlimited amount when they die, with no estate tax, because of an IRS tax exemption provision called the unlimited marital deduction. The marital deduction allows the first spouse to die to leave his or her entire half of the estate to the surviving spouse tax-free. However, when the surviving spouse dies and passes the combined estate to his or her heirs, the estate will only benefit from the surviving spouse’s tax exemption. Therefore, the exemption of the first spouse was wasted.
To preserve the exemption of the first spouse to die, many couples use an A/B trust (also called a "bypass" or
"exemption" trust). When the first spouse dies, any
amount up to $3.5 million dollars, as of January 1, 2009,
is placed into the A/B trust. This trust is not taxed at that
time nor at the later death of the surviving spouse.
A tax planning provision in the A/B trust splits a couple’s
estate into two trusts on the death of the first to die. For
example, John and Jane have a combined estate of
$7 million. If John dies first, his trust uses his $3.5 million exemption. When Jane dies, her trust uses her $3.5 million exemption. This reduces their taxable estate to $0, so the
full $7 million can go to their loved ones.
"We will explain all of your options to you and help you to pick one that best suits your estate and your family."