Don’t Waste Your Federal Credit
February 13, 2017

Brought to you by Heritage Financial Consultants in conjunction with Lincoln Financial Advisors*

People are sometimes surprised to learn that the government not only taxes the income they earn while working, but it also can tax the accumulated estate built from their work. What can you do to help reduce the sting of federal estate and gift taxes and protect your family’s inheritance? Start by looking at your will and beneficiary designations.

Many married couples arrange their affairs so that all of their property will pass to their surviving spouse. This arrangement may seem like a good plan. It’s simple and — thanks to an unlimited federal gift- and estate-tax marital deduction — generally allows you to leave all your property to your spouse estate tax free. But it may not be the best plan. Why not? Because it doesn’t take advantage of your federal credit. Ultimately, the property your surviving spouse receives from you could be taxed as part of his or her estate.

What is the Federal Credit?

The credit lets you pass a certain amount of assets to anyone you choose, free of estate tax. The estate amount – the credit equivalent – is $5.45 million in 2016.

Coordinating Your Credits

Married couples who coordinate the use of their credits can leave twice as much property to their families without incurring federal estate taxes. One way to take advantage of both your and your spouse’s credits is to create a family trust in your will and fund it with property equal in value to the credit equivalent. With a trust strategy, your surviving spouse can receive income for life with the remaining property passing to your children at your spouse’s death. Your credit could offset estate taxes on the trust property, and the property won’t be included in your spouse’s estate. Your spouse’s credit will be available to offset some or all estate tax on any other property your spouse owns at the time of his or her death.

To ensure the beneficial use of both your and your spouse’s credits, you may have to retitle some of your property. Let’s say you and your spouse own most of your property jointly with right of survivorship. Generally, property held jointly by married couples automatically passes to the surviving spouse with no federal estate tax consequences, due to the marital deduction. So, one spouse’s credit may be wasted. Dividing your property so that you and your spouse each own enough property separately to take advantage of the credit can remedy the problem and allow you to effectively use estate planning techniques such as family trusts.

Family trusts and retitling strategies are sophisticated planning techniques that may or may not be appropriate for you. Before implementing either technique, consult your professional financial planner.

*The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients. This article may be picked up by other publications under planner’s bylines.

Registered associates of Heritage Financial Consultants, LLC, are registered representatives and investment advisor representatives of Lincoln Financial Advisors Corp., a broker-dealer (member SIPC) and registered investment advisor, offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was created by Lincoln Financial Advisors for its representatives and their clients.