1. Each US citizen has a lifetime exclusion amount from estate taxes of
$5,340,000 (this amount adjusts for inflation each year).
2. There is an unlimited marital deduction for gifts from a deceased spouse
to a surviving spouse who is a citizen.
3. The two concepts at play at the threshold are whether to simply leave
everything to the surviving spouse and take advantage of the unlimited
marital deduction (therefore no tax on the first death) which may result
in a tax at the second death (while the unused portion of a decedent spouse’s
lifetime exclusion may be “ported” over to the surviving spouse,
the total assets on the second death may still exceed the surviving spouse’s
lifetime exclusion amount). or 4. Alternatively, fund a bypass trust to
the maximum amount of the lifetime exclusion of $5,340,000…. This
will not be taxed at the first death and will “bypass” the
estate of the survivor (i.e. not be subject to tax at the survivor’s
death; and if the survivor’s estate is $5,340,000 it will not be
taxed on the survivor’s death).
5. If there is too much money to put into the bypass trust, fund the marital
trust. This takes advantage of the unlimited marital deduction but only
to the extent necessary to avoid estate tax on the first death. There
are provisions that can be put into the marital trust that restrict the
survivor’s ability to change its ultimate disposition on the survivor’s
death (referred to as a “QTIP” trust).
Thus, by using a bypass trust, survivor’s trust and marital trust,
estate taxes may be minimized while keeping some control over the wealth
of the first to die (i.e. lock it into the bypass trust and QTIP trust).
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