For the larger estate (over $1,000,000, including the face value of your life insurance), an Estate Tax Savings Trust, in addition to providing all the benefits of a Revocable (Living) Trust, can also generate substantial savings of both federal and Ohio estate taxes. An Estate Tax Savings Trust is also sometimes called an "A/B trust" or a "credit shelter trust".
With an Estate Tax Savings Trust, a portion of the funds are allocated to a sub-trust (the Part B) for the children upon your death. This portion can pass federal estate tax free through the use of federal estate tax credits. The remaining assets may be allocated to a separate trust solely for the spouse, or given to the spouse directly. There will be no federal estate tax upon death of the first spouse, and when the surviving spouse subsequently dies, the assets in the children's trust are nontaxable assets for both Federal and Ohio estate tax purposes.
The surviving spouse can have full management control over the property allocated for him or her in the trust, and also can receive the income from the children's trust. Further, a portion of principal from the children's trust can be made available to the surviving spouse each year. The surviving spouse can even be the trustee of both trusts, and therefore continue to manage all of the assets.
The savings in estate taxes with an this type of trust can be substantial. For example, on a larger estates the Federal estate tax savings alone can be on the order of 35% of every dollar above the Federal estate tax exemption equivalent in 2012, and as much as 55% in 2013 under the current rules. The end result is that the surviving spouse and children can be well cared for while maximizing the funds available to the children by reducing estate taxes.
The exemption amount (for Federal Estate Taxes) for for those who passed away in 2011 is $5,000,000. The Federal exemption equivalent has been adjusted for inflaction for 2012 to $5,120,000. However, if the current laws remain unchanged, the exemption amount will revert to $1,000,000. Under current law, the effective Federal estate tax rate on the portion above the exemption equivalent is 35%. Again, however, it will revert to a top rate of 55% in 2013. At this time, it seems that very few people expect the current rules, as written for 2013 and thereafter, to remain as they are currently written. If, and how, they will change at this time is anybody's guess.
We have also had some significant changes in the Ohio Estate tax rules. For 2012, the Ohio Estate Tax exemption equivalent remains at $338,333, with an estate tax rate of 6% for those estates between $338,333 and $500,000, and a rate of 7% for the portion above $500,000. Commencing in 2013, the Ohio estate tax has been repealed. That means there are no estate taxes to pay for Ohio estates, regardless of its size for estates of individuals who pass away after January 1, 2013.
