You could spend all your money first, then there wouldn’t be any estate tax to worry about would there? However, that is not the easy way I’m going to share with you.
Most people are aware that the current estate exemption amount of $5.34 million for 2014 with a top tax rate of 40%. The exemption amount is scheduled to be adjusted for inflation on an ongoing basis. Over the past ten years the exemption amount has fluctuated from zero (there was no estate tax at all in 2010) to as low as $1.5 million in 2004. Low in this case is bad, you want to be able to pass as much of your estate tax free, so the higher the exemption, the more you can pass on to your children or heirs tax free.
But there is no guarantee that that the current exemption amount will stay in place and be the exemption amount when your estate is handled. So even if it is greater than what you have today, what is to say that your estate won’t appreciate and grow, as is often the case? Or, even more likely, what is to say that the laws will change and the estate tax exemption will be lowered, increasing your potential of having to pay estate tax?
Using the AB Trust
The easiest way to avoid estate taxes as a married couple is to use what is called an AB Trust. What an AB Trust does is divide into two parts (your “A” part, and “B” part) when the first spouse dies. The reason for this division is to use the estate tax exemption for the first spouse. Properly using this method, you effectively double your exemption amount.
Flexible or Mandatory?
Older estate plans are often mandatory AB trusts, meaning the surviving spouse is required to go through the work of dividing the estate and filing a separate tax return for the other trust each year. What we like to use is a flexible AB trust, giving the surviving spouse the benefit of being able to take advantage of doubling the estate tax exclusion if it makes sense when the time comes, and not locking in that decision at the time you create your trust. Who doesn’t like flexibility? If you have an older mandatory AB trust, you may want to consider updating to a flexible AB trust.
Beyond the AB Trust
For larger estates, you’ll need planning that goes beyond the living trust. Those options can include irrevocable trusts, limited liability companies, a qualified personal residence trust and something called a GRAT, and others with even weirder names.
Flexible and Simple
For most married couples, the simplest and easiest way to avoid estate taxes altogether is a flexible AB living trust.