Estate Planning to Maximize Asset Retention

The movement in Washington to eliminate the federal estate tax may be gaining ground, but that doesn't erase the fact that the government continues to collect more than $25 billion a year from the deceased.

The top federal estate tax rate dropped by one percentage point this year under provisions of the 2001 tax law. That's a drop in the bucket considering that the estate tax could still claim up to 49 percent of taxable estate assets if you died in 2003. And if the scheduled repeal of federal estate taxes is not made permanent, the top estate tax rate will return to 55 percent in 2011.

The estate tax has been described as "voluntary" because there are ways to help reduce it. If you and your spouse would like to see your heirs receive as much of your estate as possible, you may want to consider the merits of a living trust or will with a bypass provision.

Trusts and Estate Planning

Two Better Than One

When a married couple utilizes a living trust with a bypass provision (also called an A-B trust), the couple’s assets will be placed in two trusts upon the death of the first spouse. An amount up to the applicable exemption amount is placed in Trust B, the deceased spouse’s trust. The remaining assets are placed in Trust A, the survivor's trust. The surviving spouse can retain control of Trust A and receive income from both trusts. Upon the death of the surviving spouse, the assets in Trust B may pass to the couple's heirs free of probate and federal estate taxes provided that the trust is irrevocable and the surviving spouse is not considered the owner of the trust. The assets in Trust A pass to the couple's heirs free of probate and federal estate taxes if they are valued at less than the spouse's applicable exemption amount in the year of the spouse's death.

For married couples, a trust with a bypass provision essentially doubles the amount of an estate that can be excluded from estate taxes. In 2003, the first $1 million of an estate is exempt from federal estate taxes (the exemption eventually reaches $3.5 million in 2009).

We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!

Fred and Gloria Pollard

Read 650+ verified reviews

When you add together real estate, retirement savings, investments, and other assets that are part of an estate, the exemption amount can be exhausted quickly. A properly structured bypass trust may help you reduce or manage estate taxes and help preserve assets for your heirs.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.

Rule Changes can Modify Estate Planning Strategies

Under budget rules of the 2001 tax act, the estate tax is repealed in 2010. However, unless Congress takes action, the federal estate tax will be reinstated in 2011.