On January 2, 2013 President Obama signed the American Taxpayer Relief
Act of 2012 into law creating new tax laws for 2013 and into the indefinite
future. As a result, the estate tax exclusion amount (the amount that
an individual can own at death before estate tax liability is incurred)
jumped up to $5,250,000 per individual with yearly increases for inflation.
The estate tax rate was raised to a flat rate of 40%.
As a result, a married couple can now pass away owning a total of $10,500,000
without incurring estate tax liability. This takes the vast majority of
married couples out of the estate tax danger zone, assuming that Congress
does not act to decrease the exclusion amount in the future. Many couples
who set up joint trusts in the past should revisit their estate planning
to determine if their current plan should be modified to account for these
recent changes in the law.
One of the most common marital estate plans involve setting up an "A-B"
trust whereby at the death of the first spouse to die the trust estate
is divided (usually equally) between a survivor's share and a decedent's
share. The decedent's share funds into an irrevocable trust (often
called a "bypass trust," "exemption trust," or "credit-shelter
trust") designed to separate and shelter the decedent's share
of the trust estate from the survivor's taxable estate with the effect
of entirely eliminating or reducing estate tax liability at the death
of the surviving spouse. The survivor's share usually continues on
as a revocable trust for the benefit of the surviving spouse.
Based on the size of the married couple's estate, a bypass trust may
not be necessary anymore and may in fact create capital gains tax liability
for heirs when the surviving spouse passes away. If estate tax avoidance
is no longer necessary, a better solution for married couples may include
amending the living trust so that the deceased spouse's share of the
trust estate passes:
- To non-spousal heirs (after taking into consideration the needs of the
- To the surviving spouse either outright or in a revocable trust.
- To an irrevocable power of appointment trust (comparable to a typical bypass
trust) providing trust income and other limited trust distributions to
the surviving spouse while restricting the ability of the surviving spouse
to direct the disposition of the trust during his or her lifetime and
at death, except to the creditors of the estate of the surviving spouse.
This provides moderate to strong asset protection of trust assets in most
situations while also providing favorable capital gains treatment.
The determining factor in selecting an option from the above scenarios
would be centered around issues of asset protection for the benefit of
either the surviving spouse, the children, or both. For example, if the
surviving spouse remarries, the deceased spouse's share of the trust
can be protected for the benefit of the children of the deceased spouse
in a marital trust.
Under the latter two scenarios the surviving spouse may opt to elect portability
of the deceased spouse's unused estate tax exclusion amount under
IRC 2010(c)(4) and (5) in a timely filed estate tax return, thereby ensuring
that such credit is applied against the surviving spouse's taxable estate.
Amending your trust to remove an unnecessary bypass trust may be handled
as easily as a simple amendment.Assuming your estate plan was competently
drafted, I recommend that you visit with the attorney who drafted your
trust so that you may keep amendment costs at a minimum. An amendment
of an existing trust by a new attorney may require a complete revision
of the document since the new attorney would be required to read the entire
document for any unfamiliar terms thereby raising the costs of making
an amendment. In situations involving taking an old trust to a new attorney
for an amendment, the new attorney will often completely amend the document
to terms familiar to the new attorney rather than spend the same amount
of time reading the document and drafting a more simple amendment since
the cost would be the same to you either way.
For additional financial health information attend Torrance Memorial's
Financial Planning Workshops.
Eric J. Harris is certified as a legal specialist in Estate Planning, Trust and Probate
law by the State Bar of California Board of Legal Specialization, in Redondo