Tax Planning With Trusts

Minimize Your Washington Estate Taxes with a Bypass Trust

Under federal law, the current estate and gift tax exemption amount for federal taxes in 2015 is $5.43 Million and a surviving spouse may use the deceased spouse’s unused federal estate tax exemption by timely filing an estate tax return and electing to add the deceased spouse’s unused exemption to the surviving spouse’s exemption. This means that married couples may be entitled to a total exemption of close to $11 Million. The exclusion amount in Washington State, on the other hand, is only a little over $2 Million and it is not portable, meaning it cannot be transferred to the surviving spouse by making an election. However, if one’s estate is worth more than $2 Million, some simple planning using trusts can be done to reduce or avoid the Washington Estate Tax.

It is possible to prevent all or a portion of the deceased spouse’s wealth from being included in the surviving spouse’s estate while allowing the surviving spouse to use this wealth during his or her life. Under this plan, the will of the first spouse to die divides the deceased spouse’s wealth into two shares at death. The first share is equal to the Washington State estate tax exemption at the time of the first spouse’s death. This share is allocated to a credit shelter or bypass trust. The rest of the deceased spouse’s estate is allocated to a QTIP (qualified terminable interest property) or marital trust. Both trusts provide that distributions may be made to the surviving spouse to provide for that spouse’s health, education, support and maintenance and both trusts designate a beneficiary or beneficiaries of the trusts’ assets upon the surviving spouse’s death. The deceased spouse’s exemption is used to avoid estate taxes on the amount in the credit shelter trust. The deceased spouse’s personal representative claims the estate tax marital deduction for the marital trust and it passes to the surviving spouse tax free. When the surviving spouse dies, his or her estate will include his or her separate assets and what is left in the marital trust but will not include property put into the credit shelter trust.

This plan removes the amount in the credit shelter trust from the surviving spouse’s estate and utilizes the deceased spouse’s exemption to avoid paying tax on the amount in the credit shelter trust. Without the two trusts, the entire estate of the deceased spouse would pass to the surviving spouse and the couple would not be able to use the deceased spouse’s exemption. The surviving spouse would then only have his or her own exemption upon death. In addition to avoiding or reducing Washington State estate taxes, if the surviving spouse has financial difficulties in the future, the assets in the credit shelter trust will be protected from the surviving spouse’s creditors.

To learn more about bypass trusts and other ways of tax planning through the use of trusts, please give us a call today!