How Proper Planning Can Save You Thousands in Estate Taxes

December 1, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

trust-estateUnless one of your primary objectives is to fund the government with more of your money, taking the initiative of planning your estate should be one of your top priorities. Far too often people find it an inconvenience to plan their estate; however what is commonly misunderstood is that by taking the time to structure your estate, you could potentially save upwards of thousands of dollars.

One of the optimal tools to use when it comes to estate planning is the creation of a Revocable Living Trust. However, what many attorneys sometimes fail to explain is that even within a Trust, there are certain methods that can be used to help reduce the amount of estate taxes one would normally pay. This trust is commonly referred to as the “AB Trust.”

Under an AB Trust, married couples are given the ability to maximize the use of their federal exemptions from estate taxes. Currently, any estate valued over $5M would be subject to the tax (for the amount in excess of $5M). However, although the current exemption limit is set at $5M, there are strong indications that Congress is to reduce that limit back down to $1M in 2013.

So let’s give a brief breakdown on how an AB Trust works:

How the AB trust system works

In order to avoid being a victim to a steep estate tax, spouses have the option of setting up an AB trust, where each spouse leaves their property to a trust. An AB Trust is created by establishing a living trust with an AB provision. Although the trust remains revocable while both spouses are alive, when the first spouse passes away, the trust becomes irrevocable and is split into two separate components: the A trust and the B trust. Under the A trust, the surviving spouse holds his/her half of the estate, and controls all the property while receiving distributions of income and principle on a need-basis.

On the other hand, the B trust contains the deceased spouse’s share of the estate. Typically, the funds transferred into the B-Trust belong to the beneficiaries, who are usually the children. However, the surviving spouse has the right to use the property during his/her life and is allowed to receive any income, if needed. It is upon the death of the surviving spouse that the property in the B-Trust passes to the beneficiaries designated in the original trust document, as well as the assets contained in the A-Trust.

Advantages of an AB Trust

The property that is contained in the B-Trust is never considered part of the surviving spouse’s estate; therefore it is not subject to estate taxes. It is only the property contained in the A-Trust that is subject to estate taxes at the time of the surviving spouse’s death, but if the A-Trust contains less than the estate tax exemption, then no estate taxes will be imposed. Although many presume an AB Trust is only appropriate if you carry in excess of $5M, which is the current estate tax threshold, this is not necessarily the case because it is always important to note that the current laws may not be the laws in the future. The laws change on a constant basis, and a proper estate plan takes into consideration not just what applies today, but what could apply in the future.

Disadvantages of an AB Trust

With every good comes a little bad. There are disadvantages to an AB trust. After the death of the first spouse, the A and B trusts requires separate tax returns. In addition, the AB trust can limit the surviving spouse’s rights to the trust property, depending on how it is worded.

It is always important to note that an AB Trust is not suitable for every household. With all its benefits, there are reasons for families to not implement such a Trust and to instead utilize the regular Revocable Living Trust. However, it should also be noted that consulting with a professional in the field could prove to be vital as it could potentially save you hundreds, if not thousands of dollars.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at adil@josephlaw.net or (517) 381-2663.

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Federal Government Reinstates the Estate Tax – What That Means to You

May 26, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

FeaturedImageRecently, the Federal government has reinstated a law that will have a significant impact on how we manage our estate. Beginning in 2011, the Federal government brought back the federal estate tax, which imposes a 35% tax on any estate exceeding $5 million, or $10 million for married couples.

An estate tax is defined as a tax imposed on your gross estate that exceeds the exemption limit. For example, if John dies leaving a gross estate of $6 million, his total taxable estate would be $1 million ($6M – $5M). Thus, his estate would pay $350,000 in estate taxes to the government ($1M x 35%). Note: only assets owned by you individually at the time of your death are included in your estate.

Although the common citizen may overlook this law due to the large required estate, it is important to note that many experts consider this $5 million exemption to only be temporary. By the end of 2012, it is widely speculated that federal lawmakers will revert back to the pre-2001 days, where there was only a $1 million exemption and a tax rate of 55%.

Whatever the exemption amount, there are certain tools at your disposal that can assist you in lowering your estate for purposes of avoiding the estate tax altogether, or lowering the amount of money that you will be required to pay to the government. The following are certain deductions that are available to reduce your estate taxes:

(1) Marital Deduction: any property transferred to your spouse upon your death is excluded from your estate;

(2) Charitable Deduction: donations made to a charitable organization are deducted from your estate (creating a charitable remainder annuity trust – CRAT – is beneficial in this regard);

(3) Irrevocable Trust: this is a trust that takes ownership away from you individually and transfers title to your trust’s name; therefore, because you no longer claim individual ownership, the size of your estate is reduced.

The above options are effective means to help reduce your estate; however, you are not restricted to just those. That is why it is always advised that you consult with an attorney who is well-versed in estate planning and asset protection to ensure that you have structured a sound estate plan. Remember, although the exemption may not apply to you this year, there is a strong likelihood that the exemption limit will dramatically decrease by 2012. Plan now to be assured that you have the utilized the right tools to reduce your estate. After all, it is always better to pay your heirs as opposed to the government.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Estate Planning, Shariah Estate Planning, Asset Protection, Business Litigation, Corporate Formations, Physician Contracts, and Family Law. To contact him for any questions related to this article or other areas of law, he can be reached at adil@josephlaw.net or (517) 381-2663.

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