Friday, December 28, 2012

Turning the Grim Reaper into a Paper Tiger

          As I write this, tax season is just closing and it was time to write that nice check to Uncle Sam.  At the same time, Halloween decorations are starting to pop up all over town including little cardboard statues of ghosts and grim reapers.   It’s kind of an odd illustration, but the whole thing sort of reminds me of the old adage, “There are only two things certain in life:  Death and Taxes.”   Interestingly, both death and taxes involve estate planning. 

          This week I want to alert you of a change in the law taking effect on January 1, 2013, which could significantly increase your estate tax obligation if you are married and your assets total $1 million or more.  This law will result in many couples leaving far less to their children, with more money instead going to the government to pay estate taxes.  Here’s a description of the problem. 

          The federal government allows every person to give away a certain amount of money, either during their lifetime or upon their death, without being taxed on those sums.  The amount of money changes every year.   Under the law of 2012, you can leave $5,120,000 without being taxed – it’s an estate tax exemption.  But on January 1, 2013 the estate tax exemption falls to a mere $1,000,000, and the maximum tax rate over that amount is as high as 55%.  This means that if you and your spouse die with more than $1 million in assets, your estate could very well be paying some hefty estate taxes.  These are rates we haven’t seen since 2001 and 2002.  Since this is an election year with taxes being a major issue in dispute, it is anyone’s guess whether Congress will rally to change the laws prior to January 1st.  Therefore, when addressing estate planning needs, we have to draft estate plans as though the 2013 law remains in place, and do our best to stretch that $1 million estate tax exemption as far as we can.  How do we do that?  By using an A/B Trust.  Here’s how it works:

Upon the death of one spouse, the trust has a provision that splits the assets into two separate bundles, although they still remain in trust.  Under the 2013 law, into the first bundle (Part B), $1 million is placed.  The remaining assets go into Part A.  Part A passes fully tax free to the spouse.   The other $1 million in Part B is tax exempt, because of the $1 million estate tax exemption.  This Part B bundle generally identifies the spouses’ children as the heirs, but it also has one very neat provision:  The spouse also gets to tap into the assets in Part B and use them if he or she needs to.  Then when the second spouse dies, Part B goes to the children tax-free, and whatever remains in Part A passes on to the children, with the first $1 million in Part A also being exempt from estate tax.  So you’ve protected $2 million from estate tax.  Had you not used an A/B Trust and instead left everything to your spouse, who in turn left it to your children, you would have missed the chance to protect $1 million from taxes. 

             So that’s a summary of A/B Trusts in a nutshell.  If it sounds confusing, it really isn’t, but it is very difficult to explain in a brief overview such as this.  A/B Trusts have been around for a long time so you can trust them. 

             Have a Happy Halloween everyone, and may every grim reaper you see be nothing more than a paper tiger.

For more information on estate planning and other legal needs, or if you have a legal question you would like for me to address, please visit my website at, email me at, or call me at 512-863-5658.  My office is located in Tamiro Plaza, 501 South Austin Avenue, Suite 1320, in Georgetown, Texas.

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