Estate Taxes


It depends on a number of factors, primarily the size of your estate and the efficacy of your estate plan. In addition to the federal estate tax, some states have their own, independent inheritance and estate taxes. Many strategies can be utilized to protect your estate from taxation or minimize the amount paid. Steps must be taken early to take full advantage of many of these strategies, and it is important to note that the laws governing estate taxes are continually changing, so your plan must be kept up to date.

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A married individual can give an unlimited amount of assets, either by gift or bequest, to his or her spouse without any federal gift or estate taxes being imposed. This allows married couples to delay the payment of estate taxes at the passing of the first spouse because when the surviving spouse dies, all assets in the estate over the applicable exclusion amount will be included in the survivor’s taxable estate. Please note: the unlimited marital deduction is available solely to surviving spouses who are citizens of the United States.

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A Credit Shelter Trust, also known as a Bypass or A/B Trust, is used to reduce or eliminate federal estate taxes. It is generally used by married couples with estates exceeding amounts exempt from federal estate tax. Upon the death of the first spouse, the Credit Shelter Trust establishes a separate, irrevocable trust with the deceased spouse’s share of the trust’s assets. The surviving spouse becomes the beneficiary of this trust, with the children as beneficiaries of the remaining interest. This irrevocable trust is funded to the extent of the first spouse’s exemption, meaning the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse. In effect, the Credit Shelter Trust takes full advantage of the first spouse’s estate tax credit. 

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A Qualified Personal Residence Trust (QPRT) lets you give away your home (or a vacation home) at a significant discount, freeze its value for estate tax purposes, and at the same time continue to reside in the property. How? You transfer the title to the QPRT and reserve the right to live in the home for a specific amount of time. If you live in the house for the period of time specified in the QPRT, it passes to your children or other beneficiaries without incurring additional estate or gift taxes. (Appreciation of the house’s value is protected as well.) Afterwards, you can still live in the house but are required to pay rent to your family or the designated beneficiary to avoid the residence being included in your estate. 

Conversely, should you pass away before the number of years allotted for living in the home by the QPRT, the full value of the home will be included in your estate for tax purposes, but you likely will not suffer financially when compared to what might have happened if you had not used a QPRT. 

In addition, the QPRT provides asset protection against creditors because, technically, you do not own the property once it has been transferred to the QPRT.

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A properly drafted and administered Irrevocable Life Insurance Trust (ILIT) keeps the proceeds in your life insurance policy outside of your estate, thereby preventing them from being counted as part of your estate and avoiding the prospect of losing half the policy’s value to estate taxes. The proceeds from the insurance policy instead become a source of liquidity that can be used to pay debts, estate taxes and other expenses, as well as being a source of income to loved ones.

An ILIT can be designed to accomplish a number of goals, such as providing income to a surviving spouse with the remainder going to children from a previous marriage, or having the assets distributed to beneficiaries over time if they are financially irresponsible. 

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A properly designed and funded Family Limited Partnership (FLP) benefits family members by protecting assets and reducing estate and gift taxes, while allowing you to maintain control of the assets in the FLP. It lets you make gifts of limited partnership interests to your children or other beneficiaries, and accomplish several estate planning goals, including:

Reducing the taxes your heirs would have to pay when you pass away, since the value of each limited partnership interest you give away decreases the value of your taxable estate. Gifts are made using the annual gift tax exclusion, meaning you do not have to pay gift tax on the transfer
A minority discount can be applied to reduce the value of the limited partnership interests that you give away. That’s because limited partners cannot control the day-to-day operation of the partnership. And, a discount can be applied based on the lack of marketability of the limited partnership interest. The result? You can transfer more wealth to beneficiaries while maintaining your control over FLP assets
Protecting assets from creditors due to the fact that general partners in the FLP are not required to distribute partnership assets

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