There are different types of trusts that can be used in the field of estate planning, and a trust can provide a solution to an estate planning challenge. With this in mind, we will look at the value of qualified domestic trusts in this blog post. However, to understand the benefits, you have to digest some information about the federal estate tax.
If you are exposed to the estate tax, you have to implement estate tax efficiency strategies, because it can have a very negative impact on your financial legacy. This tax carries a 40 percent maximum rate, so we are not talking about a small nibble.
There is a line in the sand that is drawn between those who must paid the estate tax and those who are exempt in the form of the federal estate tax exclusion. This exclusion stands at $5.43 million for the rest of 2015. We are emphasizing the year because there are annual adjustments to account for inflation. The figure will probably be a bit higher next year after an inflation adjustment is applied.
The exclusion is the amount that you can transfer before the estate tax would be applied. However, there is an unlimited marital deduction. You would be using a portion of your federal estate tax exclusion to transfer assets to anyone other than your spouse tax-free. It is possible to use the unlimited marital deduction to transfer unlimited assets to your spouse free of taxation. That is, if your spouse is an American citizen.
The unlimited marital deduction is not available to surviving spouses who are citizens of other countries. There is a logical rationale behind this. The taxman wants to get paid eventually, and this may never happen if a surviving spouse was to return to his or her country of citizenship with a tax-free inheritance.
However, if you are married to a citizen of another country and you are exposed to the estate tax, you could make your spouse the beneficiary of a qualified domestic trust. The trustee that you name in the document could distribute the earnings from the trust to your surviving spouse without incurring any estate tax liability.
Under certain circumstances distributions from the principal could be made, but these distributions would be subject to the estate tax.
After the death of your surviving spouse, assets that remain in the qualified domestic trust would be transferred to a secondary beneficiary of your choosing. This distribution would be subject to the estate tax.
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