A common way for a wealthier couple to minimize their estate taxes is to set up two trusts within each of their Wills or revocable trusts, to be established upon the death of the first spouse.
A family trust receives the full exemption amount, with the remainder passing to a marital trust.
As the name implies, the marital trust is established for the benefit of one’s surviving spouse. Unlike the family trust, it passes into the surviving spouse’s taxable estate at her death for tax purposes, but it passes through the first spouse’s estate completely tax-free, thanks to the marital deduction.
Decide which assets go where
Your trustee is responsible for setting up both trusts and deciding which assets to place where. It is important for him or her to consider how much income each asset is producing, due to the different tax characteristics of each trust.
For example, high appreciating securities should be transferred into the family trust, because the trust balance ultimately passes directly to your issue, not your surviving spouse’s estate, and any appreciation in the assets of the family trust will escape taxation in the surviving spouse’s estate.
The marital trust, on the other hand, should be funded with low appreciating items because any appreciation in those assets will be subject to estate taxation in the surviving spouse’s taxable estate.
There are a number of factors to consider when establishing a marital trust. For example, the fact that the federal estate and gift tax exemption is higher than Connecticut’s exemption means that the first spouse’s federal exemption might be partially wasted.
Fortunately, there are trust structures that would be able to fully utilize both exemptions. Contact a Connecticut estate planning attorney to find out if such a trust might be appropriate for you.
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