Understanding Estate Taxes
Strategies To Reduce Or Eliminate Your Estate Taxes
4. Use Both Exemptions
If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But this can be a tax trap, because it wastes an exemption.
Let's say, for example, that Bob and Sue together have a net estate of $4 million and they both die in 2008. Bob dies first. He leaves everything to Sue, so no estate taxes are due then. When Sue dies, her estate of $4 million uses her $2 million exemption. The tax bill on the remaining $2 million is $900,000!
But if, instead, Bob and Sue plan ahead, they can use both their exemptions and pay no estate taxes. A tax-planning provision in their living trust splits their $4 million estate into two trusts of $2 million each. When Bob dies, his trust uses his $2 million exemption. When Sue dies, her trust uses her $2 million exemption. This reduces their taxable estate to $0, so the full $4 million can go to their loved ones.
This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.