2022 AFBA Financial Planning Guide

a tax–free basis. In effect, John’s use of the By-Pass Trust protected the entire estate from taxation. 15–7. STATE INHERITANCE TAXES. In addition to federal tax, your survivors might also be required to pay an estate, death, or inheritance tax to the state where you live or claim legal residence. Many states are now in the process of converting their systems to follow the federal guidelines, but several have retained their former methods of estate valuation. Consequently, it is important to know if your state is a community property or common law state. Community Property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In a community property state, each spouse is normally considered to own one–half (50%) of the family’s total community property. Upon the death of one spouse, the surviving spouse usually receives half of the estate tax–free while the other half is subject to the State Inheritance Tax. Common Law is the term usually applied to the remaining states, most of which have adopted an “absolute interest” statute. The purpose of the absolute interest statute is to provide the surviving spouse with a specified percentage of the decedent’s estate free from the consequences of estate taxes. While there is wide variance in state laws, it can generally be said that amounts received by persons other than surviving spouses, will be subject to estate transfer taxes less any applicable credit.

gift tax returns is the annual $15,000 per donee exclusion. Other authorized deductions include estate debts, decedent medical expenses, and probate costs. After reducing the amount of your estate or gift by your authorized deductions or exclusions, the tentative amount of your estate or gift tax is determined by using the rates outlined in the table on the previous page. In effect the first $11,700,000 of an estate will be transferred tax free. Estate values in excess of $11,700,000 are taxed at a rate of 18-40%. Trusts. A common tax planning technique involves the establishment of trusts, the operation of which can best be illustrated through an example. Assume that John and Mary Jones own two homes, some investments, and other property. They have two children and John is in bad health. Using the unlimited marital deduction John can leave the entire estate to Mary on a tax–free basis. However, when Mary dies she will leave her estate to her children which may be subject to estate taxes. One solution to avoid taxes on Mary’s estate lies in the establishment of a Bypass Trust by John. Under the Bypass Trust, John can transfer a portion of the estate assets into a trust. John can specify that the income of the trust will be used to provide for Mary’s support. He can also designate that the principle of the trust will pass to the children upon Mary’s death. In effect John can support Mary and still eventually transfer part of their original estate to the children on a tax–free basis. John will use his unlimited marital deduction to transfer the remaining portion of the estate directly to Mary. Since Mary has no say in who ultimately receives the amount remaining in the trust, the trust property is never included in Mary’s estate. Consequently, when Mary dies, she can then use her estate tax credit to transfer the remaining funds to the children on


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