Applicable Exclusion Bypass Trust

The current Federal Estate Tax applicable exclusion (“Applicable Exclusion”) is $5,000,000.00 through December 31, 2012 ($1.0 million after January 1, 2013 if Congress does not extend by December 31, 2012). Married individuals owning assets that exceed the Federal Applicable Exclusion should consider use of trust (in a Will or living trust) to shelter the Applicable Exclusion (“Bypass Trust”) for the benefit of spouse and children. Outright gifts to a spouse are also deductible for Federal Estate tax purposes, but leaving all of one’s estate to a spouse has the result of taxing all assets of the couple in the spouse’s estate. At the spouse’s subsequent death the entire amount over his or her own Applicable Exclusion plus any unused Applicable Exclusion of the first to die will be taxed. Through December 31, 2010 the Applicable Exclusion amounts are portable, meaning that any unused Applicable Exclusion amount of the first to die may be used by the surviving spouse. After December 31, 2010, the first spouse to die would have wasted his or her Applicable Exclusion and possibly subject the assets to taxation at the death of the second spouse. By use of a Bypass Trust for the surviving spouse the first spouse to die will caused an amount up to the Applicable Exclusion to avoid tax at the death of the second spouse. The surviving spouse and children enjoy the benefits of the assets in trust during the life of the surviving spouse and the children receive the trust principal without tax at the death of the surviving spouse. Under current law it is possible for married individuals to avoid taxation on $10,000,000.00 ($2,000,000.00 after January 1, 2013 if Congress does not extend the law).

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