The federal estate tax exemption has increased in recent years from $600,000 to $5,490,000 in 2017. Less than 1% of families are subject to the federal estate tax. However, for those families that are subject to this tax, it can be devastating.
Many individuals and couples who are facing a federal estate tax at their deaths transfer assets to an irrevocable trust during their lifetime to remove those assets from their estate. Each person can transfer $14,000 each year either to an individual or to a trust for the benefit of that individual. A married couple, together can give $28,000 each year ($14,000 per spouse) either to an individual or to a trust for the benefit of that individual.
Example: Mom and Dad have a combined estate of $13,000,000. Even with a properly drafted will or revocable living trust, there will be an estate tax bill due to the IRS of about $1,000,000 after the death of the surviving spouse. They have three children and seven grandchildren. Since both Mom and Dad can both transfer $14,000 to an unlimited number of people each year tax free, they decide to create an irrevocable trust for the benefit of their children and grandchildren, and they transfer assets valued at $260,000 each year to the trust. They name their trustworthy son as the trustee of the trust. It will be his job to manage the trust assets until Mom and Dad die, and then distribute the trust assets in accordance with the instructions given him by the trust instrument.
Justin T. Crain is an estate planning attorney in the Plano, Texas office of Thomas Walters Estate Planning where he provides legal services including Wills, Trusts, Gun Trusts, Guardianship Administration, Probate, Estate Administration, Medicaid Planning and Nursing Home Planning to those in the surrounding areas of North Texas.