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© 2006 Ainer & Fraker, L.L.P.
living trust can help you reduce your
estate tax liability to Uncle Sam. To
see how this tax reduction works, letís
examine the following hypothetical case:
Client Family has an estate of $4
million. The husband dies in 2006,
leaving his entire estate to his Wife.
Under the 2006 tax rate, each spouse is
entitled to an exemption of $2 million
(known as Unified Credit Amount), which
is not subject to Federal Estate Tax.
Any amount over $2 million is subject to
taxation at a rate up to a maximum of
According to the current law, here is
the likely scenario without a Living
Trust. The husband is able to transfer
his entire estate to his wife, and pay
no taxes at his death. This transfer is
referred to as the Unlimited Marital
Deduction, and it allows the husband,
upon his death, to transfer any amount
to his wife, free from estate tax.
That sounds like a pretty good deal,
until you learn why Uncle Sam supports
it. Uncle Sam knows that he is not
giving up his right to collect the
Estate Tax, but merely postponing it. By
postponing it, Uncle Sam can collect a
higher rate of taxes than he can by
taking it immediately because both
spouses did not use their exemption.
The husband has transferred his entire
estate to his wife, and she now has an
estate of $4 million. When the wife
dies, Uncle Sam will allow her to use
her $2 million tax exemption, but the
remainder is taxed up to a maximum rate
The result is that the wife will pay
nearly $900,000 in estate tax on the $2
million of her estate that is not
excluded from the estate tax.
Why will the wife have to pay nearly a
million dollars in estate taxes?
Remember that the $2 million exclusion
is allocated to each spouse. When the
husband died, he did not use his
exemption, and therefore, it was not
available to help his wife upon her
The Unified Credit is a ďuse it or lose
itĒ tax exemption. If you fail to use it
at the first spouseís death, it is gone
forever. Fortunately, this outcome can
be avoided through some basic estate
Letís examine what happens if Client
Family has a Living Trust. At the
husbandís death, $2 million passes
outright to his wife in the Marital
trust. $2 million passes to a Bypass
Trust. In this scenario, both Unified
Credit exemptions are used. The wifeís
$2 million exemption is applied against
the Marital trust, and her husbandís $2
million exemption is applied against the
Client Family passes on $4 million to
their children, and the children pay no
estate tax. For the price of a Living
Trust, Client Family saved nearly a
million dollars in estate taxes.
Which result do you prefer for your
John Erik Fraker,
Esq., is an estate planning attorney and
managing partner of Ainer & Fraker,
L.L.P., a Silicon Valley-based law firm
specializing in estate planning, small
business law and tax. The firm's web
site is at
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© E. Stassinos, Esq. 2005. All Rights Reserved.