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Tax Planning for Married Couples

With the advent of the portability of the exemption amount of the first spouse to die, it initially appears that it is no longer necessary to do traditional tax planning for married couples. This is not true for Illinois couples whose combined estates now or will in the future exceed the Illinois exemption (currently $4.0 Million). Since the Illinois exemption is not portable, at the death of the surviving spouse only one Illinois exemption will be available to reduce Illinois estate tax. If the estate of the surviving spouse is greater than a single Illinois exemption, there will be an Illinois estate even if no federal estate tax.

Similarly, if a couple wishes to create Dynasty or GST-Exempt Trusts for their children, the GST-exemption of the first spouse to die will be lost unless tax planning is done prior to death. In addition, in order to elect portability, the estate of the deceased spouse must file a complete federal estate tax return. This will increase the expenses of the estate of the first spouse to die and may delay distribution of the estate to the family.

These issues can be avoided by creation of trusts at the death of the first spouse to die so that both Illinois and the GST tax exemption of deceased spouse are used and not wasted. Instead of giving everything outright to the surviving spouse, the first spouse to die can allocate his or her federal and Illinois lifetime exemption amount and GST tax exemption to one or more trusts for the benefit of the surviving spouse.

Traditional tax planning for married couples is designed to create a “Family Trust” or “Bypass Trust” by the living trust of the spouse who dies first. This allows a couple to pass up to twice the lifetime exemption amount tax-free to your family at the death of the surviving spouse. This planning will “capture” the lifetime exemption amount of the deceased spouse, so it is not wasted. Most importantly the family is protected against drastic changes in the estate tax that may reduce the exemption amount or increase the tax rate.

The Family Trust is not included in the surviving spouse's taxable estate and generally provides:

  • All of the income to the spouse.
  • Principal distribution to the spouse as needed for support.
  • Spouse may be one of the trustees or even the sole trustee
  • Children may be additional beneficiaries of trust and receive income or principal.
  • Spouse may have the power to direct where the trust goes at his or her death subject to guidelines set by the deceased spouse.

Tax and Non-tax Benefits of the Family Trust:

  • Spouse has the benefit of the assets without owning them.
  • Creditor protection from the claims of the spouse's creditors.
  • Family Trust is not included in the spouse's federal or Illinois taxable estate.
  • Assets can grow estate tax free during the spouse’s lifetime.
  • Family Trust, including growth, passes estate tax free to the children.
  • Can be used to prevent a new spouse or children of a new marriage from receiving assets
  • Can protect and provide for children of a prior marriage.
  • Provides ultimate distribution to children.