What is an estate tax?
The tax that is levied on a deceased person’s assets is known as an “ Estate tax”.
Estate Tax is applicable at the federal as well as State levels in some states. So, even if you are exempted from Federal tax, you might be required to pay the state-level tax in some states.
The Federal Estate Tax exemption for the year 2022 ranges from 18%-40% and generally applies to assets over $12.06 million.
In the year 2023, this exemption will be $12.92 million.
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States with Estate Taxes
Can I avoid estate taxes with a basic living trust?
A basic Revocable Living Trust does not avoid Estate Taxes. Its main objective is to avoid Probate only. The reason it is common among people is its flexibility. The Grantor can alter or add changes to it anytime before his death.
There are several Irrevocable Living Trusts which avoid Estate taxes. AB Trust is a classical example of this.
AB Trusts are Trusts made by married couples jointly to avoid Estate Tax. The term “AB” has been given to these trusts because upon the death of one spouse, this Joint Trust splits into 2 Trusts, namely Trust A and Trust B.
Trust A - Survivor’s Trust
Trust B - Decedent's Trust
The surviving spouse has little control over the Decedent’s Trust but he can still take a few advantages. For example- receive income from the decedent’s trust or continue to live in the house of the decedent, etc. Provided that all these things are written in the Trust document of the Decedent.
So, from the above discussion, we can conclude that the primary goal of AB Trust is to avoid “Double Taxation” and make sure that the benefits of the Trust are given to the appropriate Beneficiary, which is usually the spouse in most cases.
Tax consequences of a Living Trust
1. Income Tax
2. Gift Tax
