Save Estate Taxes and Avoid Probate With Trusts

A humorist once described estate planning as a means of passing from this world into the next without passing through the Internal Revenue Service. While this comment is meant to be funny, there is some truth in it. In fact, an important estate planning goal is to reduce estate taxes to the lawful minimum permitted by Congress.

Start With the Marital Deduction

The federal estate tax is repealed for any deaths that occur in the calendar year 2010. In 2011, estate taxes are reinstated in full at rates as high as 55 percent on estates exceeding $1 million. Note, that further changes are expected to these laws from Congress later this year -- check back for future updates. 

If you are married, however, anything you leave outright to your spouse, whether by will or joint ownership, will typically pass completely estate tax-free at the first death, regardless of how much you are worth. Assets you leave in a marital trust for your spouse's benefit will qualify, too. This results from an unlimited marital deduction (which applies provided both spouses are U.S. citizens; if either is not a U.S. citizen, special rules apply).

If either you or your spouse has or expects to have an estate that exceeds the initial tax-free allowance, the marital deduction is a superb tax shelter. But beware: relying too much on this deduction to protect the estate of the first spouse to die can cause unnecessary taxes on the survivor's estate. When the survivor dies, the IRS will be waiting to collect taxes on your combined assets exceeding the exemption.

Bypass Trust Savings

To shelter property from tax in the survivor's estate, an often-used strategy is a bypass trust, also known as a credit shelter trust.


Dr. Davison has assets of $2 million. In 2011, he leaves $1 million either outright to Mrs. Davison or in a marital deduction trust for her benefit. His will places $1 million in a bypass trust that is to pay her an income for life; at her death, the principal not used for her lifetime needs will go to their children.

The first $1 million qualifies for the marital deduction. While the second $1 million in the bypass trust does not, it does qualify for the tax-free allowance available to every estate. Later, when Mrs. Davison dies, the bypass trust assets are not taxable in her estate, nor do they go through probate, because the principal bypasses her estate and is distributed directly to the children. The tax savings are significant, assuming Dr. Davison dies first. (Minimizing or avoiding tax, regardless of who dies first, requires the balancing of your estates and the use of coordinated trusts.)

Tax Breaks for Charitable Gifts

The government encourages gifts to qualified charitable organizations by completely exempting their value from gift and estate taxes. A deduction is allowed not only for outright gifts and bequests, but also for the transfer of a remainder interest for a charitable purpose, such as one involving a personal residence or farm or a charitable remainder trust.

For example, suppose you want to create a trust that will pay an income to your spouse for life (or even to yourself first and then to your surviving spouse). A charitable remainder trust can be created to fulfill this desire. You can set up a charitable remainder trust now, or if you would like income paid to your survivors, establish one in your will.

When the trust terminates at the death of the last income beneficiary (or the expiration of the trust term), the remaining balance is paid to the charitable organization(s) you selected. Two important results follow: No estate settlement costs are paid from the trust assets because they pass outside of probate, directly to the charitable beneficiary. Additionally, the remainder is not subject to federal estate tax if the income beneficiaries are you and/or your spouse.

Using charitable trusts in your estate plan allows you to benefit your heirs in ways that otherwise might not be possible.

Please contact Jackie Peterson at 507-933-7543, or via e-mail at, for more information.