How to Reduce the Estate Tax Using the A-B Revocable Living Trust

In a past article I relayed the plight of the widow who stated:

"I didn't realize what an A-B Revocable Living Trust meant and that it had to be divided between the survivor and the deceased spouse and that I am limited as to what I can use from his share."

She told me that she only learned of this after her husband passed away. This is too late for many (there is a way to collapse an A-B Revocable Living Trust, which we'll talk about in another article).

First, what is an A-B Revocable Living Trust? I spend a great deal of time going over this in my free Multi-Media Course, available at http://www.livingtrustsecrets.com. Basically it is the splitting of a husband and wife's estate into two shares, his share and her share. The reason is to capture, or use, the estate tax unified credit amount that each spouse receives on death.

Let's explain. Since we know Uncle Sam likes to receive his inheritance too, whenever there is a death, we always need to ask "is there a tax?"

When we talk about taxes on death, we are talking about the federal estate tax (your state may also have a tax, sometimes called an estate tax or an inheritance tax. The difference is who is liable for payment of the tax? the estate or the inheritor? But let's not get side-tracked on the state tax. Let's stick with talking about the federal estate tax).

So let's say you have a "simple will." In a simple will, you will usually say "when I die, leave everything to my spouse." Very Simple.

Now, is there a federal estate tax? First, realize that the passing of property on death is a privilege and not a right. Therefore, it is taxable event. Even though it is a taxable event, however, the tax code tells us that everything that is left to our spouse is tax-free under what is called the "marital deduction." So, in our simple will example, there would be no estate tax since everything you leave to your spouse is tax free.

Uncle Sam is patient. He is willing to wait until the second spouse to die passes away. Now, he gets to collect his tax on the total of both shares: the husband's share and the wife's share.

What happened with the "simple will" is that you have wasted the federal estate tax unified credit amount (currently $1.5 million) that can be left tax free to anyone.

So, what the A-B Revocable Living Trust is designed to do is to capture and preserve the federal estate tax unified credit amount available when the first spouse dies. It does this by creating what is often called the "credit shelter" trust.

The "credit shelter" trust (the "B" trust in an "A-B" Trust) is an irrevocable trust that springs into being out of your Revocable Living Trust when the first spouse dies. This trust is designed to be managed by the surviving spouse for the benefit of the surviving spouse, without giving the survivor any "taxable incidents of ownership."

What this accomplishes is that upon the death of the second spouse to die, the assets that had been placed into the "credit shelter" trust are not considered to be owned by the second spouse to die. Therefore, they are not included in or taxed as part of the second spouse to die's estate.

This can often save hundreds of thousands of dollars, since the federal estate tax rate kicks in at 37% and goes up from there.

Good luck and until next time,

Phil Craig

P.S. Feel free to forward this on to any friends.

Phil Craig is a licensed attorney and entreprenuer. He started practicing law at age 25 in 1979. He does not take on any more clients, but is advisor to some of the biggest names in the internet world. He shares his knowledge gained over the last 25 years at his Living Trust Secrets newsletter site: click here=========>http://www.LivingTrustSecrets.com

** Attn Ezine editors / Site owners ** Feel free to reprint this article in its entirety in your ezine or on your site so long as you leave all links in place, do not modify the content and include our resource box as listed above.

If you do use the material please send us a note so we can take a look. Thanks.

In The News:


Insider Guides to IRS Audits!

Ever wish that, as a business owner, you knew exactly... Read More

Employment Taxes ? Depositing With The IRS

If your business has employees, you must pay employment taxes.... Read More

Home Business Tax Tips

If you have recently started an Internet or home business,... Read More

Fiscal Deity: Tax Consultant

Strategic planning throughout the year results in a minimal tax... Read More

What is a Federal Tax Lien?

A Federal Tax Lien (FTL) is a legal instrument that... Read More

Small Business Tax Issues for Self-Employed Individuals

The United States is a nation of entrepreneurs. There are... Read More

The Internet Tax Man Cometh

Q: I was contacted by the city tax collector to... Read More

Hurricane Katrina ? How To Use Your Business Loss To Get A Refund on 2004 Taxes

With the massive losses caused by Katrina, the economy of... Read More

Amending Procedural Laws for Collection of E-taxation

The electronic transaction ordinance defines the certificated copies in which... Read More

Organizing Your Taxes

Does this scene sound familiar? It's April 7. You haven't... Read More

Send Your Kids To Summer Camp and Write It Off

If you paid someone to care for a child so... Read More

Tax Reduction Tips

In the rush to get tax returns prepared and filed... Read More

Save Money on Taxes - Double Your Income Now With Tax Saving Tips on Deductions

Adding Your First Additional Stream of IncomeMost new wealth builders... Read More

What the Tax Software Companies Dont Want You to Know

Haven't done your taxes yet? No problem. Now there is... Read More

Business Tax Deductions

As we enter mid-March, taxpayers begin to become very interested... Read More

Navigating The Internet Sales Tax Laws

QUESTION: I have been contacted by my local city... Read More

Tips and Simple Guidelines on How to Calculate Payroll Taxes

Managing a business small, medium or big requires you to... Read More

Access to E-records by Taxing Authorities: A Case for Pakistan (Part I)

Background issues of access to recordsTo assess the records at... Read More

How Home-Based Businesses Can Avoid Giving Uncle Sam More than His Share

How Home-Based Businesses Can Avoid Giving Uncle Sam... Read More

Anticipating Your IRS Refund Can Cost You Plenty

While accountants are reaching for aspirin, millions of Americans are... Read More

Knock-Knock-Knock

Knock-Knock-KnockWho's there?The IRS!The next quarterly payment of estimated income tax... Read More

Reducing Taxes Through Dividend-Salary Mix Calculations

Should I take wages or dividends from my privately owned... Read More

Tax Reform, My Way

We need real tax reform and we need it now.... Read More

The Tax Man Cometh... To Search

You're at your office, or home, and the doorbell rings... Read More

Truly Bizarre Taxes: The Tax on Illegal Drugs

One can never underestimate the enthusiasm that politicians have for... Read More