Splitting Trusts: How Married People Can Utilize Trusts to Save on Estate Tax

The state of Oregon has the lowest estate tax threshold in the nation at one million dollars. In Oregon, if someone dies and their estate, which can be thought of as their “net worth,” is over one million dollars, the amount over one million is taxed by the state as an estate tax. The first million dollars is called the “exemption” because the first million dollars is exempt from being taxed.

How does this affect married couples with combined estates? A common scenario, with no advanced estate planning taking estate tax into consideration, is that when the first spouse dies the surviving spouse inherits the entire estate. Generally, spouses do not pay estate tax when inheriting from a spouse and the tax is only due when the second spouse dies. Let’s consider a married couple who has a combined net worth of two million dollars. After the first spouse dies, the surviving spouse inherits everything, and the surviving spouse’s individual estate is then worth two million dollars. When the surviving spouse passes away with an estate valued at two million dollars, the amount over one million will be taxed. In this scenario the estate of the surviving spouse would pay estate tax on one million dollars.

A marital revocable living trust can be utilized to preserve both spouses’ one million dollar exemption. Let’s look at the scenario of a married couple with a combined estate valued at two million dollars with a marital revocable living trust in place. With a marital revocable living trust in place, when the first spouse dies, the surviving spouse has the option to “disclaim” a portion of the estate. This disclaimer essentially creates a second trust, the “decedent’s” or “disclaimer” trust, within the existing trust. The existing trust is then referred to as the “survivor’s” trust.  The second trust preserves the first spouse’s one million dollar estate tax exemption. Hypothetically, if the survivor’s trust and disclaimer trust could be funded with one million dollars each, this couple would entirely avoid having an estate tax obligation when the second spouse dies. Additionally, in the event the value of one of the trusts is over one million and therefore estate tax is still due after the trusts are split, by separating the assets, the values are lower and therefore taxed at a lower rate.

There are many things to consider when deciding how to fund a decedent’s trust and your estate planning attorney and accountant will guide you in those decisions.

There are many reasons people chose to utilize revocable living trusts for their estate plan. In addition to the potential for estate tax savings outlined above, married couples and individuals may choose to set up a revocable living trust for privacy during the administration of their estate and to avoid the probate process. Your estate planning attorney can provide more details to help you determine if a revocable living trust is right for you. Give us a call if you would like to learn more!