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One of my colleagues had a most memorable experience in estate planning. It happened several years ago. He happened to be visited on the same day by two lonely widows. One widow visited in the morning and the other in the afternoon. Their situations were so similar that it made a big impression on his mind and he related the stories to me.

Both ladies had been married to gentlemen that had created very large estates. Estates were taxable in those days for properties valued over $600,000. That meant that while we were working on estate planning, we also had to do some estate tax planning as well. He knew that it would be best for the ladies to take advantage of the marital reduction. You see, if you are married and one of you dies leaving everything to the surviving spouse, that person receives that part of the estate in an unlimited marital reduction. In other words, the survivor does not have to pay any taxes on any amount of that decedent spouse’s estate. The survivor will have no taxes due.

Then, when the surviving spouse dies, there is a tax due on everything in that spouse’s estate. This would leave the heirs with responsibility of the taxes due on the whole estate. These ladies did have some other options available to them besides burdening their children with heavy taxes. It was advised to these two ladies to divide the estate into two trust shares.

In the event of a death of either spouse, you can say in your trust that you want the estate to be divided into two equal trust shares. If this procedure is done properly, each one of those trust shares retains the current federal estate tax exemption. Right now (2102), that exemption is $5 million. You can effectively protect your estate up to a total of $10 million if you are married. But next year, if Congress does not pass another law, the exemption will be only $1 million. So proper planning is extremely important.

Anyway, each of these widows had written everything into each of their trust shares. They went to see him about how to the assets would be divided into the marital share and into the decedent share, or the survivors share in the decedent share. As they talked about it, it was clear from both of these ladies that they really didn’t need the income or the principle from the decedent share in order to maintain their current living standards. They had the option to just allow those assets in the decedent share to continue to grow. They really don’t need of the income from them, which was a good thing because they would have been required to pay income taxes.

As their options were discussed, he asked them if they would like to leave their children 3 to 4 times more than what they were currently looking at. They thought it was a great idea and wanted to know how to do that. It was explained to them that one of the techniques they could do instead of keeping the assets in the decedent share was to liquidate all of those assets and use the funds in those shares to purchase a single premium life insurance policy on the surviving spouse. This would set it up so that when the surviving spouse died, there would be no taxes due on the decedent share of the estate. It could then grow to whatever amount was possible.

Doing this with a life insurance policy increases the value of the decedent share by about four times the present value. In the survivors share, they have enough money to maintain their current lifestyle. In the decedent share, they have a life insurance policy which will be worth about four times more on their deaths, and will leave the children a lot more money.

Once the ladies died, their children would inherit a much greater size of the estate. You see, there a lot of little techniques that can be used in planning your estate to leave an even greater amount to your surviving heirs, to reduce estate taxes, and even reduce income taxes as long as you do the proper planning. This turned out to be a great event for both of those families.

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