Trust for Couples

Following a year of complete federal estate tax repeal in 2010, effective as of January 1, 2011, federal estate taxes were reinstated, with an exemption amount of $5 million per taxpayer. This means that an individual can have up to $5 million in their estate before being subject to federal estate taxes, or collectively a married couple can have $10 million in their estate before being subject to federal estate taxes, subject to certain rules and exclusions. Effective January 2015, the federal estate tax exemption rose to $5.43 million per individual due to an inflation adjustment.  Therefore, a couple will now receive an estate tax exemption of almost $11 million.  The exemption increase means that the federal estate tax is no longer a concern for most affluent Americans.

Alabama State Estate/Inheritance Taxes

Alabama’s estate tax was designed to “pick-up” the maximum allowable federal credit for state estate taxes when the decedent was domiciled in Alabama or owned real or tangible property in Alabama at the time of death. Following the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, completely repealing the state estate tax credit, Alabama phased out the federal estate tax credit, with the final phase out of the credit effective January 1, 2005. Unlike some states, Alabama does not impose a separate inheritance tax on estates.

Marital Deduction and Applicable Exclusion Planning

Transfers between U.S. citizen spouses are entitled to an estate tax deduction, therefore assets left to a surviving spouse defer the payment of any estate taxes owed until the death of the surviving spouse. However, it is possible to leave too much to your spouse – if the combined estate of a couple exceeds the applicable exclusion, leaving all of the assets outright to the surviving spouse wastes the applicable exclusion of the first spouse to die (the “predeceased spouse”). This will subject more of the surviving spouse’s estate to federal estate tax and generation-skipping transfer tax.

The solution is to create separate subtrusts designed to utilize the marital deduction to defer the payment of estate taxes until the death of the surviving spouse, while preserving the applicable exclusion of the predeceased spouse. This type of planning can also provide asset protection benefits if the subtrust qualifies as an irrevocable spendthrift trust under applicable state law, and can provide the opportunity for further tax and family planning to save taxes in lower generations.

Seek Experienced Legal Counsel

Estate planning matters are extremely complex and require a thorough understanding of the possible income, gift, estate and generation-skipping transfer taxes involved. An experienced estate planning attorney can advise you of your options and the possible tax implications of each option. For advice, assistance, and representation with trust and estate issues, contact The Hawkins Law Firm.