Recent changes in estate tax laws have caused many couples to review the appropriateness of their estate plan. The most significant change is the substantial increase to the Federal Estate Tax Exemption. The new exemption is $11.2 million per taxpayer, adjusted annually for inflation. Many estate plans using the A/B (Marital/Family) trusts as an estate tax avoidance tool were written when the estate tax exemption was as low as $600,000 per individual. The A/B Trust funded a “Family” trust (trust B) with assets of the first spouse to die, to the extent of the federal estate tax exemption. Any assets above the exemptions were distributed outright to the surviving spouse, or continued to be held in the “Marital” trust (trust A) for the benefit of the surviving spouse. Thus, the federal estate tax of the first-spouse-to-die was preserved and the balance of any assets owned at death were transferred directly, or indirectly (through the A trust) to his or her surviving spouse. Transfers to spouses during lifetime or at death are not taxable, so as a result of the A/B trust tax plan, there would be no estate tax due at the death of the first spouse, and the amount held in the Family trust (trust B) would not be included in the taxable estate of the surviving spouse.
Another major change in the tax estate tax is the concept of “portability”. With portability, any estate tax exemption unused at the death of the first-spouse-to-die is allowed to be carried over to the surviving spouse. Because of this new law, there may no longer be a need to establish the Family trust (trust B) when the first spouse dies.
As a result of the significant increase in the estate tax exemption, the A/B trust estate plan will likely result in the Family trust (trust B) being funded with all of the assets of the first-spouse-to-die, with none of the assets passing to the surviving spouse (directly or in trust). The creation of a Family trust (trust B), which will be much larger than anticipated when the trusts were written, will likely cause restrictions on assets that the surviving spouse anticipated being transferred to him or her. It will also likely involve a trustee, often a child, to become involved with the unnecessary administration and management of the assets in the Family trust. And, most importantly, the creation of the Family trust may not be necessary because of portability.
If you currently have A/B revocable trusts as part of your estate plan, you should consider meeting with your estate planning attorney to determine if this type of estate plan is still appropriate for your situation.
Joseph W. Kenny is a director and shareholder of Hamblett & Kerrigan, P.A. and practices in the areas of estate planning and taxation. He is also a Certified Public Accountant with certification as a Personal Financial Specialist. You can reach Attorney Kenny by email at email@example.com.