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Taking a look at new developments affecting estate tax returns

On Behalf of | Nov 24, 2014 | Estate Tax

Thanks to a federal law, all property left to a surviving spouse is transferred free of federal estate tax. This rule, found in Section 2056 of the Internal Revenue Code, is sometimes referred to as the marital deduction.

In fact, property left to any beneficiary, even a non-spouse, will not be subject to estate tax if it is under the current exemption amount of $5.34 million. Estates that are below that threshold are not obligated to file an estate tax return.

Why, then, should a surviving spouse be mindful of the exclusion amount? The reason is long-term planning: Upon the surviving spouse’s passing, the estate will be valued and any estate tax obligations must be paid. Thanks to a recent portability election, the surviving spouse can apply any unused portion of the first spouse’s exemption. 

A will is one way for individuals to provide for the possibility of one spouse surviving the other. Each spouse could draw up a reciprocal will, where most, if not the entirety, of the decedent’s estate is transferred to the surviving spouse. Transfers to other heirs could be specified upon the survivor’s death.

However, an attorney might suggest other options for providing income to a surviving spouse, while still shielding assets from the estate tax for future generations. A bypass trust may be an option. With this type of irrevocable trust, income from the trust can be distributed to the surviving spouse during his or her life. The trust document may also plan for the contingency of needing to distribute trust principal in times of emergency or special needs of the surviving spouse. Best of all, that trust might not count toward the surviving spouse’s taxable estate, simply passing to the designated beneficiaries.

The bypass trust can be used to provide income to one’s spouse and/or other family members during the surviving spouse’s lifetime. Subject to certain restrictions, an individual is also able to grant the trustee the power to distribute trust principal for particular needs of the surviving spouse and/or other beneficiaries. For surviving spouse estates that might exceed even the portability election, a bypass trust might be a wise choice.

Source: Internal Revenue Service, “Estate Tax,” Nov. 17, 2014

Source: Forbes, “Should Planners Bypass The Bypass Trust?” David John Marotta, Aug. 18, 2013  




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