How to Reduce the Estate Tax Using the A-B Revocable Living Trust
In a past article I relayed the plight of the widow who stated:
"I didn't realize what an A-B Revocable Living Trust meant and that it had to be divided between the survivor and the deceased spouse and that I am limited as to what I can use from his share."
She told me that she only learned of this after her husband passed away. This is too late for many (there is a way to collapse an A-B Revocable Living Trust, which we'll talk about in another article).
First, what is an A-B Revocable Living Trust? I spend a great deal of time going over this in my free Multi-Media Course, available at http://www.livingtrustsecrets.com. Basically it is the splitting of a husband and wife's estate into two shares, his share and her share. The reason is to capture, or use, the estate tax unified credit amount that each spouse receives on death.
Let's explain. Since we know Uncle Sam likes to receive his inheritance too, whenever there is a death, we always need to ask "is there a tax?"
When we talk about taxes on death, we are talking about the federal estate tax (your state may also have a tax, sometimes called an estate tax or an inheritance tax. The difference is who is liable for payment of the tax? the estate or the inheritor? But let's not get side-tracked on the state tax. Let's stick with talking about the federal estate tax).
So let's say you have a "simple will." In a simple will, you will usually say "when I die, leave everything to my spouse." Very Simple.
Now, is there a federal estate tax? First, realize that the passing of property on death is a privilege and not a right. Therefore, it is taxable event. Even though it is a taxable event, however, the tax code tells us that everything that is left to our spouse is tax-free under what is called the "marital deduction." So, in our simple will example, there would be no estate tax since everything you leave to your spouse is tax free.
Uncle Sam is patient. He is willing to wait until the second spouse to die passes away. Now, he gets to collect his tax on the total of both shares: the husband's share and the wife's share.
What happened with the "simple will" is that you have wasted the federal estate tax unified credit amount (currently $1.5 million) that can be left tax free to anyone.
So, what the A-B Revocable Living Trust is designed to do is to capture and preserve the federal estate tax unified credit amount available when the first spouse dies. It does this by creating what is often called the "credit shelter" trust.
The "credit shelter" trust (the "B" trust in an "A-B" Trust) is an irrevocable trust that springs into being out of your Revocable Living Trust when the first spouse dies. This trust is designed to be managed by the surviving spouse for the benefit of the surviving spouse, without giving the survivor any "taxable incidents of ownership."
What this accomplishes is that upon the death of the second spouse to die, the assets that had been placed into the "credit shelter" trust are not considered to be owned by the second spouse to die. Therefore, they are not included in or taxed as part of the second spouse to die's estate.
This can often save hundreds of thousands of dollars, since the federal estate tax rate kicks in at 37% and goes up from there.
Good luck and until next time,
Phil Craig
P.S. Feel free to forward this on to any friends.
Phil Craig is a licensed attorney and entreprenuer. He started practicing law at age 25 in 1979. He does not take on any more clients, but is advisor to some of the biggest names in the internet world. He shares his knowledge gained over the last 25 years at his Living Trust Secrets newsletter site: click here=========>http://www.LivingTrustSecrets.com
** Attn Ezine editors / Site owners ** Feel free to reprint this article in its entirety in your ezine or on your site so long as you leave all links in place, do not modify the content and include our resource box as listed above.
If you do use the material please send us a note so we can take a look. Thanks.
Warning: include(inc/ads-body.inc) [function.include]: failed to open stream: No such file or directory in /home/accounta/public_html/7461_business_personal_taxes.php on line 70
Warning: include(inc/ads-body.inc) [function.include]: failed to open stream: No such file or directory in /home/accounta/public_html/7461_business_personal_taxes.php on line 70
Warning: include() [function.include]: Failed opening 'inc/ads-body.inc' for inclusion (include_path='.:/usr/lib/php:/usr/local/lib/php') in /home/accounta/public_html/7461_business_personal_taxes.php on line 70
MORE RESOURCES:
 ABC News | IRS offers help paying taxes Washington Post When you have 140 million individual tax returns, "you need to be continually looking at ways to serve people," Shulman said. "This effort continues my ... Time Is Running Out to Collect 2006 Refund Record Number of Tax Filers Owed No Taxes in 2008 IRS Waiting For Claimants To $1.3 Billion Tax Refunds For 2006 |
 Richmond Times Dispatch | Time to go home; bills on taxes, schools and more were completed Henderson Gleaner INDIANAPOLIS — Businesses got a breather on taxes. Schools won authority to shift some extra dollars into the classroom. Taxpayers received the right to ... Local lawmakers back sales tax increase Bolling wades into rules dispute Gregoire calls special session for Monday |
 Boston Globe | Social Security to start cashing Uncle Sam's IOUs The Associated Press For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year. Not anymore. ... Boomers' retirement offers opportunities, challenges Social Security to start cashing government IOUs |
Govt to release tax review by May budget Sydney Morning Herald The biggest review of Australia's tax system in more than 60 years will be released within two months. Treasurer Wayne Swan announced on Sunday the ... |
Condo buyer's welcoming gift: Bill for taxes owed by developer Chicago Tribune Kenya Merritt has no problem paying the property taxes on her Austin neighborhood condo, but she isn't keen on paying taxes for the developer. ... |
 The Star-Ledger - NJ.com | Christie will propose constitutional amendment to cap tax hikes The Star-Ledger - NJ.com In a budget address on Tuesday, Christie will seek to limit annual tax hikes. TRENTON -- Gov. Chris Christie will propose a constitutional amendment ... |
Another sneaky Queen's Park tax attempt: Sa Toronto Sun Di Novo calls it a “novel idea” that will not cost any tax dollars. Excuse me? Why shouldn't affordable housing come from our tax dollars? ... |
Marois blasts premier on his integrity Montreal Gazette Proposals put up for discussion included tax measures, like the elimination of payroll taxes, favouring consumption taxes over income taxes and lower taxes ... |
 Salon | Legislative push aims to tax Internet sales in California Sacramento Bee Most Californians probably don't know they're supposed to keep track of all those online or catalog purchases and declare them on their state income tax ... Tax laws need to be fair to small business New tack for taxing online sales Amazon.com Tactics Draw Harsh Criticism |
New Hawaii law lowers huge unemployment tax hike BusinessWeek Businesses in Hawaii are getting immediate relief from the nation's largest increase in unemployment taxes after Gov. ... Lingle signs bill lowering unemployment tax increase |
Are You Overpaying Taxes If You Use Tax Preparation Software?
For many business owners the answer to this quandary is tax preparation software. Fill out a fairly simple interview, click "print" and out comes a completed return that will pass muster with the IRS.
Tax Tips - Which Tax Form Is Right For Me?
IRS Tax forms can be confusing.Am I a 1099 or a W-2.
Tax Help Secret: Avoiding the Entreprenuers Curse
Your days as an entrepreneur and businessperson are consumed with one primary activity; making money. Whether you think in terms of growing your business, getting the word out there, or some fancy new marketing technique, your days and weeks and months in business are focused on that one group of activities.
The Implications of Income Tax Charge on Estate Planning
OverviewIn the Pre-Budget Report of December 2003 the Chancellor Gordon Brown announced proposals to levy an Income Tax charge from 6th April 2005 in those circumstances where the transferor of an asset retains and interest or continues to benefit from that asset. In the instance of real property, the 'benefit' envisaged is the transferor continuing to reside in the property he/she has allegedly given away.
The Seven Deadly Tax Sins: Commonly Missed Deductions
It's that time again, the April 15 tax deadline is looming large. If youre like most people, you havent gathered all of your tax records, let alone filled your return.
Donating Cars To Charity - New Tax Rules
On June 3, 2005, the IRS released guidance on charitable deductions for donated vehicles. The American Jobs Creation Act (AJCA) radically changed the amount of the deduction taxpayers can claim for their donated car.
Corporations Failing To Claim AMT Exemption Overpay Taxes By $11,000
Does your incorporated business pay alternative minimum tax ["AMT]? If so, there is a 93% chance you have been overpaying your taxes by an average of $11,000 a year according to the Treasury Inspector General.The Office of the Treasury Inspector General for Tax Administration was created in 1999 to oversee the IRS.
Tax Trap #2 -- Double Taxation: Isnt Once Enough?
Have you been thinking about incorporating your small business or self-employment activity? The advantages are many!For starters, you'll be protecting yourself and your family from the possible of a business ending lawsuit. Forming a corporation is Step One on the path known as "Asset Protection" -- you are moving from the world of unlimited liability to the world of limited liability.
Tax Trap #3 -- IRS Penalties, Interest and Love Letters
As a small business owner or self-employed person, one of the easiest ways to keep Uncle Sam off your back and out of your life is to file your forms, payments and other paperwork on time.Over the next four months there are several key dates that you dare not forget! Here they are -- all in one place, along with links to the IRS website PDF file for that particular form, where appropriate.
Failure To Pay Employment Taxes - Penalties
As an employer, you must pay employment taxes if you have employees. Fail to pay and the IRS will rain all over your parade.
Correspondence From The IRS - Yikes!
It's a moment every person dreads. You pick up the mail and there is an envelope from the IRS.
Gambling Income and Expenses - Tax Requirements
Hit a big one? With more and more gambling establishments, keep in mind the IRS requires people to report all gambling winnings as income on their tax return.Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse and dog races and casinos.
Tax Reform, My Way
We need real tax reform and we need it now. Previous attempts have been made at tax reform, but they have only provided band-aid solutions that have still left us with too many quirks, complication, and read tape.
Access to E-records by Taxing Authorities: A Case for Pakistan (Part I)
Background issues of access to recordsTo assess the records at hosted remote retained out of the jurisdiction of Pakistan root many legal issues which are needed to be addressed. Hereinafter there is description of the emerging legal issue of access to e-records.
Tax Deductions - Mr. C.P.A. Can I Deduct a Pizza? You Too Can Deduct Your Fun By Using Tax Tips
Recently, I stumbled across a concept that could change your financial life. You can call it a paradigm shift or a new perspective or just a different way to look at things.
Knock-Knock-Knock
Knock-Knock-KnockWho's there?The IRS!The next quarterly payment of estimated income tax for the self-employed is not far off. Network marketers who receive a form 1099 at the end of the year, and/or who are expected to owe $1,000 or more in taxes, must file a form 1040-ES Payment Voucher quarterly to avoid paying a penalty.
The Annual Gift Tax Exclusion: Getting The Edge
Whether helping the kids with a down payment on their first home, paying the premiums on a life insurance policy in an irrevocable trust, or moving appreciated assets to a younger generation, annual gifting will touch the lives of millions of Americans. But before the transfer is made, an investor should spend some time looking at the investment and the tax ramifications of the property to be passed.
Uncle Sam is Ready...Are You? Organizing Tips for Tax Time
Anyone who is closely related to an accountant knows that there are not four, but five seasons in a year: Spring, Summer, Fall, Winter, and 'Tax Season.' During the other seasons, we accumulate leaves, snow, and mosquito bites.
How to Maximize Your Home Business Tax Deductions for 2005
Someone once said, 'the best way to calculate your taxes is?Honestly'. For 2005, add 'Smartly' to that and you'll get to keep more than you make.
How To Get An Extension To File Your Business Tax Returns
Yes, the tax season is upon with the first filing date for some businesses being March 15, 2005. If you can't imagine getting your tax returns together by that date, you need not worry.