By Attorney Dan Vu

The Ohio Marital Deduction allows a surviving spouse to take a deduction equal to the value of assets of he or she receives from the deceased spouse. This can result in reducing the Ohio Estate Tax to zero. Sounds great right? Well, too often Attorney’s think this is so, regardless of the family situation and what tax implication this may have in the future.

An example of this was a widow who met with an attorney specializing in probate. He also filed Ohio Estate Tax forms for his clients. He presented to her this wonderful option of paying zero in estate taxes by using a marital deduction on all her deceased husband’s assets. However, the widow was over 70 years old with over $700,000 in farmland.  Also, her children, had for some time now taken over the responsibility of farming the land.

So while it is true that she would not have to pay a dime in estate taxes now, it still may not be the option she would choose if all the consequences were known. What was not told to her is that as a direct result of the marital deduction being taken, when she would pass, her estate would have an incredibly large check to pay to the Ohio Treasurer (in the tens of thousands of dollars!).  Perhaps, a better option would have been to disclaim her husband’s portion of the farm to her children, who were already farming the land and who were to inherit the land at their parents death. Furthermore, an Ohio Qualified Farm deduction could have been taken to reduce if not eliminate the Ohio Estate Tax altogether, but this time, without leaving a large tax to pay when the surviving spouse would later pass.

As the difference can be tens of thousands of dollars in savings, make sure you, and at the very least, your attorney, understands the implications of your choices when filing an Ohio Estate Tax Marital Deduction.  If we can help, call us for a free consultation.

by Attorney Thom L. Cooper

For couples with taxable estates, we use a “Spousal Options Trust” to allow the surviving spouse greater flexibility in optimizing estate tax savings.

Here’s how they work. Normally a couple sets up a special joint revocable living trust called a “Spousal Options Trust”, with the husband and wife acting as co-trustees of their trust, using their social security numbers. This type of living trust gives the surviving spouse options with respect to tax savings at the first death of either spouse. Normally in this type of joint trust, each spouse owns half of the assets in the trust. Let’s say the husband dies first. The trust says “leave everything to my wife except that, whatever she disclaims, that she refuses to take, will remain in a trust for my wife (i.e. the husband’s trust). The disclaimer is a legal document that lists the assets disclaimed and their value. The wife remains as trustee on husband’s trust after he dies and may use the funds in his trust for her health, maintenance and support. Every year, she may also remove, for any reason, 5% of the trust assets or $5,000, whichever is greater.

The reason the wife is limited to health, maintenance and support is a rule by the IRS. If she had the right to take whatever she wants at any time for any reason, the IRS would say that she has complete control of the funds and would then seek to tax those funds in her estate. The access for health, maintenance and support, however, is sufficiently broad so as not to cause a problem for her. She may also continue to buy, sell and trade assets in the husband’s trust. This trust continues for her lifetime and pays out to the heirs at her death along with her own trust.

The husband’s social security number died with him so we must apply for a trust tax identification number on the husband’s trust. The husband’s trust then reports as a separate taxpayer during the wife’s lifetime. Assets from the husband’s trust are not includable in the wife’s estate. Indeed, what has happened is that husband’s trust was settled on his death and left to his heirs, but subject to wife’s lifetime use and enjoyment of the trust assets.

The benefit of this Spousal Options Trust is that it allows the wife to decide (or the husband if wife dies first) how much to leave in the deceased spouse’s trust based on his estate size and her age, health and the ever changing tax laws at that future time. Formerly, attorneys would simply do their best to split the assets between the two trusts and simply say whatever was in the deceased spouse’s trust remained there for the surviving spouse’s lifetime. This yielded some unfortunate results.

In Ohio this type of trust still begins to save Ohio estate tax with an estate of approximately $340,000 and the trust can save approximately $21,000 of unnecessary Ohio estate tax. With Federal estate tax, the rates can be over 50%, but the good news is they changed the law in December of 2010 so that you don’t have to pay this Federal tax until you have more than that. However…in 2013 the Federal limit returns to a million and then the trust will again allow you to save tax on anything over that. Who knows what our erratic legislators are going to do in the future…but with a Spousal Options Trust you are covered either way.

If you want to learn if this trust could be for you, come in for a free initial consultation and you can find out.