ESTATE PLANNING NEWS

THE NEW TAX LAW: In December 2010, Congress finally acted on the estate tax, and the change was significant.

The change ushered in two good things and one bad thing. 

Good things:

  • $5,000,000 exemption
    Each of us now has a $5 million dollar exemption from the federal estate tax. 
     
  • Portability
    When the first spouse dies, the deceased spouse's $5 million exemption is automatically portable to the surviving spouse. Thus, each married couple has an automatic $10 million exemption. Portability eliminates the need for your A/B Trust. In fact, your A/B Trust now hinders Portability.

Bad thing:

     This law may last only two years. On January 1, 2013, if Congress doesn’t act, the exemption drops back to $1 million and Portability disappears.

The A/B Trust History:

     For the past twenty years, there was no Portability. So, the only way to capture the exemption of the first spouse to die was to use an A/B Trust. Very simply, at the first spouse’s death, the A/B Trust split into two Trusts, Trust A and Trust B. Trust A was the surviving spouse's Trust, and Trust B was the deceased spouse's Trust. Each Trust held its own estate tax exemption. Trust B captured the deceased spouse's exemption because it became irrevocable. The A/B Trust allowed you to combine both spouses' exemptions and eliminate $500,000 or more in estate taxes. That was great. The A/B Trust was the industry standard for 30 years.

     The negative to the A/B Trust was that after the first death, the A/B Trust involved creating an irrevocable trust, getting a separate tax ID number, filing an income tax return every year, and going to the expense of re-titling assets to the irrevocable trust. Also, any assets moved into Trust B no longer received a step-up in capital gains tax basis at the surviving spouse's date of death. But all of this was worth it to eliminate the estate tax.

Portability:

     Now, with Portability, you no longer need the A/B Trust to capture the deceased spouse’s estate tax exemption. Portability automatically combines both spouses exemptions without the hassle of the A/B Trust. But Portability is actually hindered by the A/B Trust, because it requires the split of assets before you can even elect the new Portability option. Accordingly, to use Portability, all A/B Trusts need to be restated into a “Uni-Trust.” Restating the A/B Trust is especially important for estates of less than $5 Million. With the new Uni-Trust, everything automatically goes to the surviving spouse. You no longer need to split the assets into two trusts, or file separate yearly returns. Additionally, because all of the Trust assets belong to the surviving spouse, all assets get a new stepped-up basis at the second spouse's death. (Capital Gains step-up can be a huge benefit for estates with appreciated stocks or real estate.) Portability makes things so much easier at the first and second death.

Tax Law Reversion in 2013:

     But the new Tax law has a downside. If Congress had made this law permanent, the new Uni-Trust would fix everything for years to come. But Congress only made this change last for two years. That means that if you restate your Trust this year, you may need to restate it again in January 1, 2013. The way to fix Congress' flip-flopping is to build a new Uni-Trust that assumes Portability but allows the surviving spouse to choose the A/B Trust if needed. This type of Trust is called a Disclaimer Trust. That way, if Congress changes its mind on Portability or the size of the exemption, a Disclaimer Trust is built to ride that wave of change.

When an A/B Trust Should Still Be Considered:

An A/B Trust is still a useful tool under the following circumstances:

  • an estate of $10 million of more
  • families with children from a prior marriage
  • gifts directly to grandchildren (i.e. using the generation-skipping transfer tax exemption)
  • and non-citizen spouses


     If your situation meets one or more of these criteria, contact us - we can help you put together an estate plan that meets your needs.