One of the first things that high net worth individuals should take into account when they are engaged in the process of estate planning is potential exposure to the federal estate tax. There are steps that can be taken to mitigate this exposure, but you have to know where you stand with regard to the estate tax parameters as a starting point.
After the enactment of the American Taxpayer Relief Act of 2012 supposedly permanent estate tax parameters were established. The amount of the exclusion is $5.25 million in 2013 with an allowance for ongoing inflation adjustments. The top rate of the tax is 40%.
If you are married you have the ability to bequeath any sum of money to your surviving spouse free of the estate tax without reducing your available exclusion because of the unlimited marital deduction.
While the above is true in a general sense there is a caveat of sorts attached to it. It is quite possible for Americans to marry people who are citizens of other countries. If you were to do this the marital deduction does not apply.
People who are in this situation will often respond by creating qualified domestic trusts. These trusts are designed to provide distributions to the beneficiary, which would be your surviving spouse, free of the estate tax.
The key is that these distributions must not come out of the principal. Earnings from the trust can be distributed to the beneficiary without the death tax being imposed.
Should you be interested in learning more about qualified domestic trusts and other more advanced estate planning tools contact our firm to schedule a free initial consultation.
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Ryan M. DenmanandDennis D. Duffy
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