Estate Planning- Trusts

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schachtw
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Joined: Mon Jul 06, 2015 6:15 pm

Estate Planning- Trusts

Post by schachtw » Tue Jun 12, 2018 8:46 pm

Bogleheads:

I’ve been reading up on estate planning, AB trusts in particular.

My wife and I live in Illinois where the estate exemption is currently 4 million, with no portability. I believe the federal estate exemption is currently just over 10 million per person with portability.

Here’s my question-
With an AB trust, what will occur tax wise if the estate value exceeds the allowable state exemption (4M), but is less than the federal exemption (10M)?

If the B (family) trust us funded to the lesser threshold, and the remaining amount goes to the A (marital) trust, wouldn’t that mean a larger tax bill than necessary?

Any insight, or correction of my assumptions/understanding is appreciated.

Regards,
Wayne

bsteiner
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Joined: Sat Oct 20, 2012 9:39 pm
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Re: Estate Planning- Trusts

Post by bsteiner » Tue Jun 12, 2018 10:18 pm

As you noted, the Illinois estate tax exempt amount is $4 million. Illinois allows a state-only QTIP election.

Someone in Illinois with a large estate would shelter the Federal estate tax exclusion amount (presently $11,180,000) and pay the Illinois estate tax on the $7,180,000 difference between the Illinois and the Federal exclusion amounts. That would shelter the income and growth on the $11,180,000 (less the Illinois estate tax) from the surviving spouse's estate.

Someone with a medium size estate might limit the credit shelter trust to $4 million, and create a gap trust for the excess (up to the Federal exclusion amount). The gap trust would qualify for the marital deduction. The executors could then elect QTIP for state but not Federal estate tax purposes, and also elect portability.

By electing portability the spouse will receive the benefit of the unused Federal exclusion amount (at the cost of having the income from the gap trust included in the spouse's estate, and giving up the first spouse's GST exemption on the excess above $4 million). However, it defers the state estate tax, and could eliminate the state estate tax depending on the size of the spouse's estate and the law at the surviving spouse's death, as well as whether the spouse remains in Illinois.

In order to determine what plan would be best, we would need more information as to the size of your estate, the likelihood your estate will grow, and the likelihood that the surviving spouse will move to a different state. Of course, we don't know what future changes in the Federal or state law might be enacted.

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Peter Foley
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Re: Estate Planning- Trusts

Post by Peter Foley » Tue Jun 12, 2018 10:45 pm

I wish I understood this better as it is a question we Minnesotan's ask as well. We too have a spousal exemption, an estate tax exclusion that is significantly lower than the federal (headed to 3M in 2020 if memory serves me correctly) and no state portability.

For those couples with assets only slightly higher than state estate exclusion, could a solution be to select or set up specific accounts where the spouse is not the beneficiary and by doing so keep the surviving spouse's assets under the threshold? Perhaps there are disadvantages to this approach.

bsteiner
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Re: Estate Planning- Trusts

Post by bsteiner » Wed Jun 13, 2018 8:04 am

Peter Foley wrote:
Tue Jun 12, 2018 10:45 pm
I wish I understood this better as it is a question we Minnesotan's ask as well. We too have a spousal exemption, an estate tax exclusion that is significantly lower than the federal (headed to 3M in 2020 if memory serves me correctly) and no state portability.

For those couples with assets only slightly higher than state estate exclusion, could a solution be to select or set up specific accounts where the spouse is not the beneficiary and by doing so keep the surviving spouse's assets under the threshold? Perhaps there are disadvantages to this approach.
Same as in Illinois, except the Minnesota exempt amount is $2.4 million ($2.7 million in 2019, $3 million beginning in 2020). A married person with a large estate will probably have a Will with a credit shelter trust for the Federal exclusion amount. A married person with a modest estate will probably
have a credit shelter trust for the state exempt amount, and a gap trust, in QTIP form, for the difference between the state and the Federal exempt amount. The executors will probably elect QTIP for the gap trust for state but not Federal purposes. Setting up specific accounts can create lots of problems.

schachtw
Posts: 89
Joined: Mon Jul 06, 2015 6:15 pm

Re: Estate Planning- Trusts

Post by schachtw » Wed Jun 13, 2018 8:53 am

bsteiner wrote:
Wed Jun 13, 2018 8:04 am
Peter Foley wrote:
Tue Jun 12, 2018 10:45 pm
I wish I understood this better as it is a question we Minnesotan's ask as well. We too have a spousal exemption, an estate tax exclusion that is significantly lower than the federal (headed to 3M in 2020 if memory serves me correctly) and no state portability.

For those couples with assets only slightly higher than state estate exclusion, could a solution be to select or set up specific accounts where the spouse is not the beneficiary and by doing so keep the surviving spouse's assets under the threshold? Perhaps there are disadvantages to this approach.
Same as in Illinois, except the Minnesota exempt amount is $2.4 million ($2.7 million in 2019, $3 million beginning in 2020). A married person with a large estate will probably have a Will with a credit shelter trust for the Federal exclusion amount. A married person with a modest estate will probably
have a credit shelter trust for the state exempt amount, and a gap trust, in QTIP form, for the difference between the state and the Federal exempt amount. The executors will probably elect QTIP for the gap trust for state but not Federal purposes. Setting up specific accounts can create lots of problems.
BSteiner:

Thanks for your response.

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