Estate Tax Planning With Living Trusts |
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| By Ralph Elliott |
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| The current federal estate tax exemption level is $5 million
for the years 2011 and 2012. The Illinois estate tax
exemption level is $2 million, which presents some planning
difficulties when considered with the federal exemption
level. Without further action by Congress, the federal
estate tax exclusion will revert back to $1 million. The ins and outs of proper planning with significant assets can be quite complicated, but some general strategies will be discussed here. First, what is the “exemption” we’re talking about? The exemption is the amount of your assets that are protected from federal and state estate tax. An estate tax is levied on any assets in excess of the exemption levels. So, for example, if a single person has $6 million in assets and dies in the year 2011 or 2012, he will be subject to federal estate tax on $1 million ($6M - $5M exemption = $1M) and Illinois estate tax on $4 million ($6M-$2M = $4M). If a person is married, there are ways to use the exemption levels for both spouses to maximize the amount of the couple’s estate that is exempt. The assets in the estate should be divided between the spouses so that each spouse has assets of at least the exclusion amount in her or her own name. An attorney would draft an estate pan that includes a bypass trust arrangement (also referred to as an A-B or credit shelter trust). The bypass trust is funded with assets up to the exclusion amount in the year of the death of the first spouse. The surviving spouse is named as the beneficiary of that trust and can receive trust income and principal distributions throughout life. If there any assets that are above the exemption level, they pass to the surviving spouse tax-free due the unlimited marital deduction. When the surviving spouse passes away, the bypass trust goes to the children and the wife is taxed on those assets that are in her own name. If those assets are less than the federal and state exemption levels, the estate tax can be avoided altogether. As an added bonus, if the first spouse to die didn’t use all of his or her $5M exemption, the surviving spouse can use the remainder on top of the surviving spouse’s exemption. The problem for years 2011 and 2012 is that the federal and state estate tax exemption levels are different, or “decoupled.” So, even if you are able to shield your assets from federal estate tax by taking advantage of the current $5M exemption, you may still have to pay Illinois estate tax on those assets that exceed the current $2M. Though outside the scope of this article, there are ways an attorney may try to work with the existing exemption article to minimize tax liability despite the decoupled federal and state estate tax exemption levels. Another problem is that no one is certain what the exemption levels will be in the year 2013 and beyond. The $5M federal exemption level only applies if a person dies in the year 2011 or 2012. In 2013, the federal estate tax will revert back to $1M unless Congress takes action otherwise. The uncertainty makes estate planning more complicated, but with the assistance of a competent attorney you can makes plans now to now to protect your assets, make decisions about who will act as your agent, organize your affairs and most importantly, take care of your of family and get peace of mind today. Ralph E. Elliott is a Freeport, Illinois Attorney whose has over 30 years of experience including an Estate Planning and also a Estate Tax practice. Ralph is the senior attorney at the law firm of Law Offices of Ralph E. Elliott, A Professional Corporation situated at 1005 W. Loras Drive, Freeport, IL 61032 which serves business, individuals and the agriculture community in Northwest Illinois. This article is intended to present general information for educational purposes, is not legal advice and should not be relied upon in connection with any particular matter. The reader is advised to immediately retain their own separate legal counsel with respect to any specific legal issue. Rights to bring a claim will expire through the passage of time by the applicable statute of limitations. ©Law Offices of Ralph E. Elliott, A Professional Corporation 2011. |
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