What if the Estate Tax Could Affect You? – Part Two

By Doug Casarella – St. Louis, MO Attorney and LegalBuffet.com writer

In part one of this article, we learned that two common deductions used to reduce estate tax liability were the marital and charitable deductions.

The marital deduction is one the most powerful tools at your disposal for reducing or eliminating estate tax liability (or at least delaying it). The deduction provides that an unlimited deduction for anything left to (or for the benefit of, in the case of money left in trust) a surviving spouse. Using it properly allows you to maximize both your and your spouse’s unified credit exemptions. For instance, suppose you and your spouse both have a potential taxable estate and do no planning. When you die, your estate is taxed and then, presumably, passes to your spouse. Later, when your spouse passes away, her estate is taxed as well and then passes on to your heirs. With a little planning, consider the alternative. Using a trust drafted carefully, you use the marital deduction and leave your estate to your spouse tax-free. It cannot help the spouse who dies second, as they will have to be taxed, but it defers the taxation as long as possible and can save a considerable amount of money.

The other main deduction used in estate tax reduction is the charitable deduction. Whether you are of a philanthropic nature, or you just prefer the idea of your money going to a cause in need instead of the government, this deduction is flexible enough to help both benefit your family and a charity of your choosing. It is not as all encompassing a deduction as the marital deduction, and depending on the charity, can get quite complicated. That said, working it into an estate plan often involves a creation of one of two kinds of trusts, charitable remainder trusts and charitable lead trusts. In the remainder trust, a trust is created and its immediate, present beneficiaries are typically family, such as a spouse or children. They get all or a portion of the income for either their lifetime or a set term of years, and then afterwards, the remainder goes to the charity. The lead trust takes the opposite approach, allowing the charity to benefit for a set number of years before the remainder goes to your family.

Using either of these deductions requires careful planning and almost certainly outside professional assistance. While you may not at present need these in crafting your estate plan of a will, revocable trust, and a couple powers of attorney, as time goes by and the economy improves, and you consider if your plan needs to change along with everything else, it will be beneficial to know the other options out there.

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