Many people also use Trusts to reduce their estate tax liability. Whether your estate will be subject to estate taxes will depend on the value of the assets you own at the time of your death and the exemption from estate taxes which is available at that time. The federal estate tax exemption amount is $5,000,000 in 2011, $5,120,000 in 2012, and under the new portability feature, a deceased spouse’s unused exemption may be shifted to the surviving spouse. The estate tax exemption amount for Massachusetts is $1,000,000. In 2013 the federal estate tax exemption amount will decrease to $1,000,000. You are also allowed an unlimited marital deduction for transfers to a spouse who is a U.S. citizen. Estate tax planning with trusts for married couples relies on the exemption amount and the marital deduction to minimize the potential estate tax liability at the surviving spouse’s death. Trusts have advantages in providing for non-spouses as well.
Why is this Better Than Leaving Everything Outright to My Spouse?
When a spouse dies and leaves everything outright to the survivor, no estate tax may be due because of the unlimited marital deduction. However, on the death of the surviving spouse, only his or her estate tax exemption amount will be exempt from estate tax. This couple will have lost the opportunity to avoid estate tax liability for the exemption amount of the first spouse to die. Using a trust in this situation enables you to provide for your spouse yet pass the exemption amount to your heirs without it being included in the surviving spouse’s taxable estate for tax purposes. The failure to use trusts may result in payment of estate taxes when more careful planning might have reduced or eliminated any estate tax liability.
Estate taxes are calculated based on the value of your “gross estate”, which includes your interest in any property you own jointly with others, retirement accounts and certain life insurance policies. The broad reach of the term “gross estate” may mean that you potentially could have a larger estate than you realize.
Jointly-Owned Property: Some people add children as joint owners of their property for convenience or to avoid probate. There are risks incurred in making someone a joint owner of your assets. The joint owner has all the rights of an owner and those assets may be vulnerable to the joint owner’s creditors. At your death, those assets pass to the joint owner which may not be consistent with your estate plan.