My wife and I are about to go to several local attorneys to see if one could draft a living trust for us. Based on initial phone calls, they say we need a A/B living trust. They said the dead spouse assets go to the B trust up to the federal exemption. The rest go to the living spouse A trust. I asked them what happens if the assets go above the A trust, and they said we have to pay taxes.
This the part I have a question about. Isn't there some mechanism where if it goes over the federal exemption in the A trust, it can go to a C trust, or D trust???? Or since there are only two people, Wife and husband, there is pretty much 2 trusts dealing with federal exemption and we just have to pay the tax on the A trust.
I just want to as informed as possible before paying the $$$.
Estate Planning Attorney
In an AB trust, the portion of the first spouse to die's assets equal to the exemption goes to the B trust and all remaining assets go to the A trust. In an ABC trust, the portion of the first spouse to die's assets equal to the exemption goes to the B trust, the portion of the first spouse to die's assets in excess thereof goes to the C trust and all the surviving spouse's assets go to the A trust. In an AB trust (if properly drafted) the A trust is subject to estate tax when the surviving spouse dies. In an ABC trust (if properly drafted) the A trust and the C trust are both subject to estate tax when the surviving spouse dies. In either case the surviving spouse's estate is entitled to the surviving spouse's own exemption. Simply put (and if properly drafted) in both the AB and the ABC trust, the ultimate beneficiaries will get the benefit of 2 exemptions, the first spouse to die's exemption and the surviving spouse's exemption. Creating more trusts (3 v 2) does not create more exemptions. The ABC trust allows more assets (ie the assets passing to the C trust) to be restricted, since all assets passing to the A trust are typically revocable and amendable and subject to unlimited use by the surviving spouse. The B and C trusts both are irrevocable and both restrict the surviving spouse's use of the assets. The C trust is typically intended to qualify for the estate tax marital deduction (ie. to zero out the estate tax at the first spouse to die's death) so that the surviving spouse can be the only beneficiary and must receive the income payable at least annually.
Estate Planning Attorney
In addition to utilizing the Federal estate tax exemption (which currently stands at 3.5 million dollars) , you may be qualify for the marital deduction (see IRC 2056) or other deductions. If you take full advantage of the marital deduction and the federal estate tax exemption amount, the first spouse to die will not pay estate tax. However, upon the death of the surviving spouse, the estate tax initially deferred will become payable (see IRC Section 2044).
In addition, if you currently have a taxable estate, their are many tax planning vehicles available to you. You may utilize any number of estate tax planning techniques to minimize, if not eliminate, your estate tax by reducing the size of your gross estate.