Reducing the Estate Tax
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Can I Pass My Property to My Children Without Burdening Them with a Big Estate Tax?
Let's say that you are married and have children and, in addition, have property and money that you plan on leaving to your spouse and eventually your children after you die. If you die before your spouse, some or most of your estate will immediately pass to your spouse, who in turn will pass it on to your children when he or she dies. However, since your spouse would be passing on not only her part of the estate, but your part as well, your entire estate would have to go through probate and may incur a federal tax, depending on the value of the entire estate. See estate taxes for a list of the exemption amount. Also, be aware that the federal estate tax may be phased out by 2010. If your estate is valued at less that $1.5 million dollars, there will be no estate tax, and you do not have to worry about an AB trust.
You can reduce how much estate tax your beneficiaries will owe by putting your part of the estate into an AB Trust when you die instead of just giving it to your spouse. By doing this, your spouse still has the right to use the property (with certain restrictions) but does not legally own the property. Since your spouse does not own the property, the part of the estate in the AB Trust will not be subject to estate tax when your spouse dies and the estate is handed over to your children or other beneficiaries you have chosen.
What Rights Does My Spouse Have Over My Estate Once I Have Died?
After you have died and your part of the estate has gone into an AB Trust, your spouse may make use of your estate for healthcare and other basic needs:
- Your spouse can get all income from your estate, including any interest
- Your spouse may use the income from your estate for health, maintenance, and education in your spouse's accustomed manner of living
- Your spouse may use the property from your estate, including living there
What is the Downside of an AB Trust?
There are some characteristics of an AB trust you should be aware of before you set up the trust:
- Your spouse will be restricted with how he may use your estate once you have died
- The surviving spouse will have to keep separate records pertaining to the property in the AB trust
- Keep in mind that there could be amendments to tax legislation in the near future concerning AB trusts
- The surviving spouse will have to file an annual income tax return for the AB trust
- The surviving spouse will need to hire an attorney for deciding how to divide the couple's assets between the AB trust and the surviving spouse's living trust
Should I Consult an Attorney when Deciding whether to Set Up an AB Trust?
The legal formalities and tax implications for AB trusts can be quite complex and confusing. In addition, there are different kinds of trusts, and an AB trust may or may not be appropriate depending on your situation. An attorney with experience in estate planning will be able to advise you as to how each kind of trust will effect you, and help you decide what kind of trust is best for you and your family.
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Last Modified: 03-13-2013 04:30 PM PDT
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