It Takes Two

It Takes Two: Two-Trust Estate Plan Benefits Married Couples with Substantial Assets

While love and marriage often go together, large estates and taxes don't have to go together for married couples. If you are married and have substantial assets, be aware of the impact of changing tax laws on your estate planning and consider limiting your estate tax with a specialized type of trust strategy. This strategy, known as an A/B plan with a credit shelter trust is available to married couples who are U.S. citizens.

Two things you can count on: Taxes and Tax Changes

Under Current law, the amount of assets you can pass on without incurring estate tax (known as the estate tax exemption amount) varies depending upon the year of your death. In 2006 - 2008, it is $2 million per person. It increases to $3.5 million in 2009. The exemption is unlimited in 2010. However, the exemption amount reverts back to $1 million per person in 2011, unless lawmakers pass permanent changes.

After you die, any assets in your estate above the exemption amount are taxed at the progressive estate tax rate. The top estate tax rate also varies under current law according to the year of your death. It is 46% in 2006; 45% in 2007 - 2009; repealed in 2010; and reverts back to a high of 55% in 2011. Many states also impose a death tax of some kind.

The deduction trap

Under the unlimited marital deduction, you can leave your spouse any amount of assets free of federal estate taxes. For this reason, many married couples have estate plans that give all the property to the surviving spouse after the first dies. The assets then go to their children after the death of the second spouse.

With this approach, the estate tax exemption for the first spouse who dies is lost. Assume that a couple has $4 million in assets and the first spouse dies in 2007. The second spouse dies in 2008 and the couple's daughter inherits everything after the second death. At the first death, the surviving spouse pays no estate taxes. However, after the daughter inherits the $4 million, she must pay federal estate taxes on $2 million of the estate. She is only able to take advantage of one $2 million exemption.

If the married couple had established an A/B plan with a credit shelter trust, their daughter may not have owed any federal tax on the $4 million inheritance.

Two trust, one solution

The A/B strategy leverages both spouses' exemption amounts to achieve substantial tax savings for heirs on federal estate tax. Here's how it works:

Your estate plan establishes two trusts that will divide your estate between them.
You title assets and assign beneficiary designations so that each spouse individually owns assets equal to the exemption amount.
At the first spouse's death, one part of the estate is placed in a marital trust (A trust) that qualifies for the unlimited marital deduction and is set up for the benefit of the surviving spouse.
The other portion of the estate will be placed in a credit shelter family trust (B trust) that takes advantaged of the estate tax exemption. Each trust may pay income to the surviving spouse; access to the principal is limited by terms of the trusts.

After the death of the first spouse, there are no federal estate taxes due. The assets in the marital trust (A trust) avoid estate taxes because of the marital deduction. The assets in the credit shelter family trust (B trust) avoid federal estate taxes because they are limited to an amount that's shielded by the deceased spouse's current exemption.

The full tax benefits are realized when the second spouse dies. With the two-trust arrangement, none of the assets in the credit shelter family trust (B trust) are taxable. The estate tax credit of the second spouse to die shields part or all of the assets in the marital trust (A trust). Further, any growth in the credit shelter trust assets (B trust) also passes to heirs free of federal estate taxes.

Not just for millionaires

Many financially comfortable couples do not think their estates will exceed the estate tax exemption amount at their deaths and do not even consider an A/B strategy. However, be aware of the following points.

The value of your estate usually increases substantially over time. For example, a house purchased for $150,000 ten years ago may now be worth $500,000. A future financial windfall, such as an inheritance, could quickly boost your net worth.

The individual's exemption reverts back to $1 million in 2011unless Congress takes action before then.
For federal estate tax purposes your estate includes your home, cars, retirement accounts, taxable investment account, collectables and death benefits from all personal life-insurance policies you own.

Asset tilting matters

How you title your assets is an important part of your estate plan. To take advantage of an A/B plan, you must title some assets in each spouse's name. Consult with your financial, tax and legal advisors for correct assets titling recommendations to support the estate plan you've created.

Just because you have a sizeable estate, doesn't mean heirs will owe sizeable federal estate taxes on it. Through advance planning and professional advice, you can reduce-and possibly eliminate-future estate taxes on your assets.

Under current law, the federal estate tax rates and individual exemption amounts vary from year to year until 2011. You may want to talk with a financial advisor about how this impacts your estate plans.

An A/B plan with a Credit Shelter Trust is frequently used to eliminate or reduce federal estate taxes for the heirs of married couples with sizable estates.

By taking the necessary steps now, you can take full advantage of the federal estate tax laws and pass your assets to your heirs in a tax-efficient manner.

Neither Ameriprise Personal Trust Services nor Ameriprise financial advisors are authorized to give legal or tax advice that goes beyond the scope of its fiduciary responsibilities associated with serving as investment agent or trustee. For legal or tax matters that go beyond these roles, clients will need to consult their own legal and/or tax advisors.

Financial advisory services and investments available through Ameriprise Financial Services, Inc., Member NASD and SIPC. Securities and mutual funds available through Ameriprise Financial Services, Inc. are not deposits or obligations of, nor guaranteed or insured by the FDIC nor any other federal or state agency and may involve investment risk, including loss of principal. Ameriprise Financial Services, Inc. is part of Ameriprise Financial, Inc.

Ameriprise Bank, FSB, is separate from Ameriprise Financial Services, Inc. and is not a broker-dealer. Ameriprise Financial Services, Inc. and Ameriprise Bank, FSB are subsidiaries of Ameriprise Financial, Inc.

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