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How to Reduce the Estate Tax by Using an A B
Irrevocable Trust along with Your Revocable Living Trust
by Phil Craig
© Phil Craig, All Rights Reserved
http://www.LivingTrustSecrets.com
In a past article I relayed the plight of the widow who
stated:
"I didn't realize what an AB Revocable Living Trust meant
and that it had to be divided between the survivor and the
deceased spouse and that I am limited as to what I can use
from his share."
She told me that she only learned of this after her husband
passed away. This is too late for many (there is a way to
collapse an A-B Revocable Living Trust, which we'll talk
about in another article).
First, what is an A-B Revocable Living Trust? I spend a great
deal of time going over this in my free Multi-Media Course,
available at http://www.livingtrustsecrets.com. Basically it is
the splitting of a husband and wife's estate into two shares,
his share and her share. The reason is to capture, or use, the
estate tax unified credit amount that each spouse receives on
death.
Let's explain. Since we know Uncle Sam likes to receive his
inheritance too, whenever there is a death, we always need to ask
"is there a tax?"
When we talk about taxes on death, we are talking about the
federal estate tax (your state may also have a tax, sometimes
called an estate tax or an inheritance tax. The difference is
who is liable for payment of the tax… the estate or the inheritor?
But let's not get side-tracked on the state tax. Let's stick with
talking about the federal estate tax).
So let's say you have a "simple will." In a simple will, you
will usually say "when I die, leave everything to my spouse."
Very Simple.
Now, is there a federal estate tax? First, realize that the
passing of property on death is a privilege and not a right.
Therefore, it is taxable event. Even though it is a taxable
event, however, the tax code tells us that everything that is
left to our spouse is tax-free under what is called the "marital
deduction." So, in our simple will example, there would be no estate
tax since everything you leave to your spouse is tax free.
Uncle Sam is patient. He is willing to wait until the second
spouse to die passes away. Now, he gets to collect his tax on the
total of both shares: the husband's share and the wife's share.
What happened with the "simple will" is that you have wasted the
federal estate tax unified credit amount (currently $1.5 million)
that can be left tax free to anyone.
So, what the A/B Revocable Living Trust is designed to do is to
capture and preserve the federal estate tax unified credit amount
available when the first spouse dies. It does this by creating
what is often called the "credit shelter" trust.
The "credit shelter" trust (the "B" trust in an "A-B" Trust) is
an irrevocable trust that springs into being out of your Revocable
Living Trust when the first spouse dies. This trust is designed to
be managed by the surviving spouse for the benefit of the surviving
spouse, without giving the survivor any "taxable incidents of
ownership."
What this accomplishes is that upon the death of the second spouse
to die, the assets that had been placed into the "credit shelter"
trust are not considered to be owned by the second spouse to die.
Therefore, they are not included in or taxed as part of the second
spouse to die's estate.
This can often save hundreds of thousands of dollars, since the
federal estate tax rate kicks in at 37% and goes up from there.
Good luck and until next time,
Phil Craig
P.S. Did you
know you can search this site or the web for more Living Trust, Wills,
Estate Planning and Probate answers?
Click here!
Phil Craig is a licensed attorney and entreprenuer.
He started practicing law at age 25 in 1979.
He does not take on any more clients, but is
advisor to some of the biggest names in the internet
world. He shares his knowledge gained over the
last 25 years at his Living Trust Secrets newsletter site:
click here=========>http://www.LivingTrustSecrets.com
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