High wealth clients can face estate taxes on a substantial portion of their estates. Currently, estates larger than $11.7 million are subject to Federal estate tax of up to 40%. While $11.7 million is a rather large number, remember that your estate includes real property, life insurance proceeds (if the policy is owned by you or by your trust) and the value of tax-deferred retirement savings, such as IRSs, 401(k) accounts and 403(b) accounts.
A properly drafted estate plan can help your beneficiaries avoid unnecessary estate taxes, leaving them more assets, especially important if those beneficiaries are minors. By incorporating special “disclaimer trust” language into your joint trust, a significant part of your estate can be legally sheltered from estate tax, substantially reducing the amount of estate tax that will be paid by your beneficiaries.
If you have previously set up more traditional estate tax sheltering trusts (commonly called “A-B trusts” or “bypass trusts”), you should consider having your estate planning documents reviewed, as this may no longer be the best approach.
If your joint estate exceeds $23.4 million (or single estate exceeds $11.7 million), more specialized mechanisms, such as irrevocable life insurance trusts (or ILITs), can be employed to help ensure that those tax obligations can be satisfied without depleting the trust assets.