- Strategy #1: For smaller and simpler situations, pass all assets to the surviving spouse outright by the use of the unlimited marital deduction (“All to Spouse Will”).
- Strategy #2: For more sizable estates, consider establishing a “B” trust at the death of the first spouse to pass the unused federal estate tax exemption amount of the first spouse to die to the “B” trust.
Structuring the estates either way postpones any federal estate taxes until the death of the second spouse. Both arrangements are feasible options, but the use of the “B” trust keeps the appreciation between deaths from being included in the surviving spouse’s estate. Portability of the exemption of the first spouse to die, when available, should not be overlooked at the first death. And even when it is used at the federal level, it may not be available at the state level, resulting in a different state planning need. This is illustrated in the following case study
A Case Study
Meet Robert and Becky, a hypothetical married couple residing in New York:
- Robert, age 58, owns a small manufacturing company
- Becky, age 55, vice president of a local bank
- $10 million combined net worth
- Familiar with the federal estate exemption amount and don’t believe estate taxes are a concern, as their combined estate is below $23.16 million in 2020 and would not be subject to federal estate taxes
NOT SO FAST
There are three potential problems:
- The couple’s current net worth is $10 million, but what will it be at death when estate taxes would be payable?
- The current federal exemption is $23.16 million in 2020 per couple, but that is scheduled to be reduced to approximately $13.18 million in 2026 and $17.06 million in 20 years assuming 2% inflation.
- Robert and Becky have ignored any state estate taxes that would be owed to the State of New York, which may be significant.
Keep reading for the solution for this couple that would completely eliminate the federal and state inheritance taxes.