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Types of Trusts

A-B Living Trusts for Married Couples

Married Couples Can Double Their Tax Savings

Transferring assets to your spouse and to your heirs is an important estate planning goal for married couples, especially when trying to reduce the potential impact of federal estate taxes. Money SavingsThis year, your estate won’t owe any federal estate taxes if you have less than $5 million in assets (set to sunset again in 2012). If you are married, you can pass along an unlimited amount of assets to your spouse free of “death” taxes (note that there are certain limits if the surviving spouse is not a U.S. citizen). However, the marital deduction leads many couples to believe they can completely avoid federal estate taxes by leaving everything to each other at death. But that is not always true.

Example: consider a husband and wife, each with $3 million in assets. When one spouse dies, the survivor can receive all of the deceased spouse’s assets without incurring any federal estate tax thanks to the marital deduction. However, the surviving spouse would then have an estate worth $6 million, but still have an individual estate tax exclusion of only $5 million. The result: his or her estate will be taxed on $1 million upon the second spouse’s death, at a rate of up to 35%—a $350,000 tax bill in this scenario. Thus, married couples need to plan more carefully if they want to retain the maximum amount of assets, and pass them tax free to their heirs.

How to Avoid Federal Estate Taxes

One way for married couples to protect their assets is to establish a “bypass” trust. In the above example, Inheritance Planninga bypass trust works as follows: When the first spouse dies, his or her $3 million would be transferred to the bypass trust free of federal estate taxes. Assuming no gain or loss in the value of the second spouse’s assets, the surviving spouse’s estate would be valued at $3 million upon his or her death, and would not be subject to federal estate taxes because it falls below the $5 million threshold. As a result, the couple would be able to avoid the $350,000 tax bill.

Equally important is a bypass trusts’ ability to provide for one’s family. A surviving husband or wife can use the income generated by the assets held in a bypass trust (as well as the principal, in some cases) to pay for a variety of living expenses, depending on how the trust is designed. In addition, the trust can transfer assets that remain in the trust upon the second spouse’s death (including all appreciation) to the chosen beneficiaries, such as children, other relatives, or even another trust that is free of federal estate taxes. The flexibility of a bypass trust enables you to take care of your spouse as well as your heirs.

Dublin Estate Planning Attorneys

If you need help planning your estate, you should speak with the experienced attorneys at our office. A married couple's complete estate plan from us consists of:

  • A Revocable Living Trust
  • Pour-over Wills
  • Powers of Attorney for Financial Matters
  • Powers of Attorney for Health Care (Advance Health Care Directive)
  • Declaration of Trust
  • Community/Separate Property Agreement
  • Real property deed to fund your trust
  • Other documents to complete the funding and estate process

More Trust Types:

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Daniela Lungu

Law Offices of Daniela Lungu
4695 Chabot Drive, Suite 200
Pleasanton, CA 94588

Phone: (925) 558-2710
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