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 surviving spouse).
- To the surviving spouse either outright or in a revocable trust.
- To an irrevocable "marital trust" qualifying for the marital deduction 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.
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.
Attorney 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 Beach. 310-540-6877.