Tax shelters
Doherty, P. tax shelters Death tax. C. If a husband and wife have an estate plan by which all of their combined net estate will pass to the surviving spouse, this may result in what we refer to as the Marital Deduction Trap. Consider the following example. tax shelters Federal-income-tax-brackets. Let''s assume Harry and Wanda have a combined net estate with a value of $1,350,000 Let''s also assume that Harry dies and all of his property passes to Wanda, either under Harry''s Will, because the property was owned by them as joint tenants with rights of survivorship, or by reason of beneficiary designations naming Wanda as Harry''s beneficiary. At Harry''s death, there will be no estate taxes due because all of his property passed tax-free by reason of the unlimited marital deduction. However, when Wanda dies, she will have an estate of $1,350,000 (or whatever it has appreciated to between Harry''s death and Wanda''s death). tax shelters Internal revenue service tax forms. Even if we assume Wanda has not used any of her Applicable Exclusion Amount by making lifetime gifts, she will be able to pass only $675,000 of her estate free of estate taxes (assuming Wanda died in 2000). The property in her estate in excess of $675,000 will be taxed at a rate starting at 37%. In other words, Wanda''s estate will still owe estate taxes of $270,750 at her death. This is a Marital Deduction Trap because, by allowing all of his property to pass outright to Wanda, Harry did not use any of his Applicable Exclusion Amount. One way for Harry to have used his Applicable Exclusion Amount would be for him to make a Will leaving one-half of his and Wanda''s net worth ($675,000) to their children, outright. Then, when Wanda dies, her estate would be worth only $675,000, all of which could pass tax free because of her Applicable Exclusion Amount. Although this may result in the desired tax savings, it may not be palatable to most couples. Wanda may protest, "Not only did I just lose my husband, I also lost one-half of our earning potential and one-half of my net worth. " Such spousal impoverishment may not be wise. In order to avoid the outright gift to the children upon the death of the first spouse, yet still make it possible to utilize the Applicable Exclusion Amount of the first spouse to die, Harry and Wanda can put into place what we refer to as "Credit Shelter Planning using a By-Pass Trust Arrangement" (a. k. a. "A/B Trust Arrangement" or "Credit Shelter Trust Arrangement"). Instead of leaving all of their estate to one another, and incurring estate taxes of $270,750 upon the death of the second spouse to die, Harry and Wanda may put into place the following estate plan. First, Harry and Wanda each put into place a will that requires the estate of the first spouse to die to be divided into two separate shares, the "Family Share" and the "Marital Share. " The Family Share will have allocated to it the maximum amount of property which the decedent may transfer free of estate tax after taking into consideration his unified credit - i. e. , the Applicable Exclusion Amount. (See article entitled UNIFIED GIFT AND ESTATE TAX SYSTEM). The Marital Share will have allocated to it the remainder of the decedent''s estate. Harry''s and Wanda''s wills then provide that the Family Share shall be held in trust, the "Family Trust", for the benefit of the surviving spouse. The Family Trust may pay all income earned by the trust to the surviving spouse, for life. The Family Trust may also permit the Trustee of the trust to distribute trust principal (the initial amount allocated to the trust and all appreciation of same) to or for the benefit of the surviving spouse, as necessary for the surviving spouse''s health, maintenance and support.
Tax shelters
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