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McClellan Legal LLC Estate Planning & Tax Assessment Blog

Tuesday, January 17, 2017

Trusts: Federal Estate Tax Planning (Article 3 of 8)

Using trusts for federal estate tax planning has been a very common estate planning strategy, but is becoming less critical for the vast majority of people.  Historically, most tax planning strategies were intended to reduce the amount of federal estate tax owed by an estate because the federal estate tax rate has been very high (max rate is currently 40%, but was 55% 20 years ago).  The federal estate tax is only implemented when an estate is valued above a certain threshold, called the applicable exclusion amount.  That is, the federal government only taxes the value of an estate over the exclusion amount. 

Over the past twenty years the applicable exclusion amount has increased from $600,000 per person to the current value of $5.49 million per person (adjusts each year for inflation).  Therefore, if your estate is valued at less than $5.49 million, then your estate will not likely pay any federal estate tax because the entire value of the estate will be less than the applicable exclusion amount.  Some publications estimate that only 0.02% of the population will be subject to federal estate tax in light of the current high applicable exclusion amount. 

For estates that are above $5.49 million, Congress made permanent in 2012 an additional tax saving provision called Portability.  Portability allows a surviving spouse to use the balance of the deceased spouse’s applicable exclusion amount in their own estate.  That is, a married couple can currently insulate $10.98 million from federal estate tax.

Prior to Portability, estate plans often implemented a Credit Shelter Trust (also known as a Family Trust) to optimize the use of each spouse’s applicable exclusion amount.  The person administering an estate for a first spouse to die would fund assets into a Credit Shelter Trust to take advantage of the deceased spouse’s applicable exclusion amount while also allowing the surviving spouse access to the assets.  In light of Portability, the person administering an estate may now simply file a federal estate tax return to preserve any unused exclusion amount for the surviving spouse’s estate instead of implementing a Credit Shelter Trust. 

There are still valid reasons to set up one or more trusts for the surviving spouse even if Portability planning is being implemented, including: providing asset protection, minimizing state death taxes, and managing income tax basis step up.  Further, Portability planning should not be implemented in a vacuum without considering other estate planning strategies.  It is important to evaluate each person’s circumstances in light of traditional Credit Shelter Trust planning and Portability planning when designing an estate plan.  Please contact our office if you have any questions or if you would like to schedule an appointment.




McClellan Legal LLC is located in Kennett Square and serves clients throughout the areas of Avondale, Chadds Ford, Coatesville, Downingtown, Landenberg, Oxford, Phoenixville, Pottstown, West Chester, & West Grove. We also serve the following towns in Lancaster County: Lancaster, Lititz, Strasburg,Millersville, Ephrata, Leola, Manheim, New Holland, Willow Street, Quarryville, Elizabethtown and Mountville.



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113 South Broad Street, Kennett Square, PA 19348
| Phone: 610-444-5552

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