The Living Trust Advisor

CHAPTER 23 Who Pays the Estate Tax? Or, Don’t Make One Person Pay the Estate Tax on Living Trust Gifts That Go to Another Person

After the death of the surviving spouse, your Living Trust’s after-death agent will inventory all the assets owned by the surviving spouse at the time of death. If the total net value of that inventory exceeds the surviving spouse’s lifetime exemption, (which I discuss at length in Chapter 22), the after-death agent will pay an estate tax to the IRS.

What is the source of the funds used to pay the estate tax? Your Living Trust assets! The beneficiaries whom you named in your Living Trust will have their respective shares reduced by the amount of Living Trust assets paid to the IRS by your after-death agent.

Now we come to the main point of this chapter. Here is the Big Issue: When the estate tax is paid, that payment will either reduce the shares of all of your Living Trust beneficiaries or reduce the shares of some of your Living Trust beneficiaries. And with this Big Issue comes the Big Question: Which beneficiaries in your Living Trust will have their shares reduced by estate taxes, and which ones will receive their full shares without any such deduction?

The Three Types of Estate Tax Allocation Provisions

In legal parlance, this is the area of the estate tax allocation, and it is probably the most overlooked subject in the inheritance arena. Ask yourself: Do you recall discussing this issue with your Living Trust attorney during any of your ...