Benjamin Franklin once wrote: "In this world nothing can be said to be certain, except death and taxes." And sometimes, unfortunately, death and taxes are closely related.
You are certainly used to paying taxes during our lifetime, but you may also be taxed after you die. Moreover, it's possible for your whole estate that you leave behind to be taxed not once, but twice!
Death and taxes may be unavoidable, but there are ways to make them less burdensome to your loved ones. Thoughtful estate planning in the form of a credit-shelter trust can help alleviate those burdens.
A credit shelter trust is a type of marital deduction trust (also called a marital trust), along with the QTIP trust and the Life Estate with Power of Appointment. Any marital deduction trust is designed to make optimal use of the marital deduction provided by federal estate tax laws, which allow property passing from a decedent to a surviving spouse to be transferred tax-free.
A credit-shelter trust (also known as an A-B trust, a bypass trust, or an exemption equivalent trust) is a way for you to pass on your estate and to avoid estate taxes. Under a credit-shelter trust, your surviving heirs would not receive your property (which would then be subject to an estate tax). Instead, your heirs would receive an interest in the trust itself.
A credit shelter trust is particularly useful for spouses whose estates would exceed the exemptible amount allowed for estate taxes. By leaving property to each other in a credit shelter trust, couples avoid having the same property taxed twice. Typically, the estate would be taxed once on the death of the first spouse (who leaves the estate to the surviving spouse), and then taxed again on the death of the surviving spouse.
However, if the property were not held in a "bypass" trust at the time of the first spouse's death, the property would pass to the surviving spouse as surviving joint tenant and thus would not be subject to taxation.
Specifically, under a credit shelter / bypass trust, each spouse has a document that creates a trust to be established after the death of the first spouse. It is important that each spouse have a document naming the other spouse as the beneficiary because of the uncertainity of who will die first.
Thus, in a bypass trust, instead of joint ownership (or tenancy by the entirety), the husband and wife would divide their assets so they each have a separate "taxable" estate. This is known as an AB trust.
Under an AB trust, when the first spouse dies, the trust is split into two separate trusts: Trust A will contain the property of the first spouse to die, and Trust B will hold the property of the surviving spouse. When the first spouse dies, the property in Trust A goes to named beneficiaries.
However, the surviving spouse usually retains the right to use the property for life. When the surviving spouse dies, the property in Trust B passes to the beneficiaries.
Importantly, the Trust B property is not considered part of the second spouse’s estate for estate tax purposes. It "bypasses" the survivor's estate at his or her death. Even though the assets in the bypass trust are "taxed" for estate tax purposes at the first spouse's death, no tax is due because of that spouse's exemption. And if the first spouse had an estate whose value exceeds the exemption amount, the surplus may be left to the surviving spouse tax-free under the marital deduction.
If you live in Michigan and need experienced estate planning help, contact Michael Einheuser for a free consultation. Michael helps families in Bingham Farms, Troy, Farmington Hills, Rochester Hills, Southfield, West Bloomfield Township, Bloomfield Township, and the surrounding Michigan areas.
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