If you have been able to accumulate a significant store of wealth, the work is not done. There is a federal estate tax in place that can erode your financial legacy. Because of the existence of this death levy, you must implement tax efficiency strategies to preserve your wealth.
The creation of certain types of trusts can be part of the plan, and we will look at the qualified domestic trust in this post. However, we should provide some background information about the estate tax before we proceed.
Federal Estate Tax Guidelines
There is a federal estate tax credit or applicable exclusion amount that separates those who must pay the estate tax from those who are exempt. For the 2014 calendar year, the applicable exclusion amount for federal estate tax is $5.34 million. Anything that you want to transfer that exceeds this amount is potentially subject to the estate tax.
The top rate of the federal estate tax stands at 40 percent, so we are talking about a significant reduction of your estate.
Unlimited Marital Estate Tax Deduction
Since there is an unlimited marital estate tax deduction, you only use your $5.34 million exclusion amount to provide tax-free bequests to people other than your spouse. This allows you to leave any amount of money to your spouse free of the federal estate tax.
However, there is a caveat to the above statement. To be able to use the unlimited marital estate tax deduction, your spouse must be a citizen of the United States. If your spouse is a citizen of another country, the unlimited marital deduction is not available.
Qualified Domestic Trusts
Now that we have provided the necessary background information, we can examine qualified domestic trusts.
If you have estate tax concerns and you are married to a citizen of another country, you could make your spouse the beneficiary of a qualified domestic trust. You also name successor beneficiaries who would presumably be your children.
Assuming you predecease your spouse, the trustee that you name in the trust agreement could distribute earnings from the trust to your surviving spouse throughout his or her life. These distributions would not be subject to the federal estate tax.
Under certain circumstances, your spouse could potentially draw from the principal, but these distributions would be subject to the estate tax unless there was a hardship waiver issued by the IRS.
When your surviving spouse spouse dies, the successor beneficiaries would assume ownership of the assets in the trust. At that time, the estate tax would be applicable.
Learn More
To learn more about qualified domestic trusts and other estate tax efficiency tools, contact our firm to schedule a free consultation.
Blaine Peterson
Attorney
Parman & Easterday
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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