New Year's Resolution #3 - Get My Estate Plan Reviewed

On December 31st, the United States went off the “fiscal cliff.” But, less than twenty-four hours later, Congress passed the American Taxpayer Relief Act of 2012 (“ATRA”). ATRA makes most of the previous estate tax law permanent. The amount that can be passed free of estate tax in 2013 is $5.25 million, with annual adjustment based on the CPI. The estate tax and the gift tax remain unified, so what is used during life is not available at death. The generation-skipping transfer tax exemption is set at the same inflation-indexed amount. This means that the amount that can be passed free from generation-skipping transfer taxes in 2013 is $5.25 million. The maximum gift and estate tax rate was increased to 40%, up from 35% in 2012.

ATRA has made portability, the process by which a surviving spouse can make use of the deceased spouse’s unused estate tax exclusion amount, permanent. However, taking advantage of portability requires the filing of an estate tax return (Form 706) for the first spouse to die. This is the case even if the deceased spouse’s estate is well below the amount that would otherwise necessitate the filing of an estate tax return. Failure to file the Form 706 in a timely manner forecloses the ability of the surviving spouse from taking advantage of the portability provisions. This requirement likely will trip up many married couples in years to come.

Before the law allowed for portability, many married couples with estates in excess of the amount that could be passed free of estate tax at first death had their Will or Trust drafted to include tax planning provisions. This planning strategy was commonly referred to as an A/B Trust. Married couples who have an existing estate plan with A/B Trust provisions should schedule a review meeting with their estate planning attorney to see if their Wills or Trust can be simplified to remove the tax planning provisions (now that portability has become permanent). Doing so would greatly simplify trust administration after the death of the first spouse and eliminate the need to file income tax returns (Form 1041) for the B Trust every year after the death of the first spouse.

Despite the fact that elimination of the A/B estate tax provisions from the Will or Trust would greatly simplify trust administration after the death of the first spouse, there are several reasons that a married couple might want to retain the A/B provisions in their estate plan:

  • The couple does not believe that the portability provisions of the new law will in fact be permanent and desires the extra protection of retaining the A/B estate tax provisions;
  • The couple’s estate plan is designed to keep assets in trust for multiple generations and there is a necessity to allocate GST exemption to the B Trust at the time of the death of the first spouse to die (the portability provisions do not apply to the deceased spouse’s unused GST exemption amount);
  • The couple lives in a state where the amount that can be passed free of state estate or inheritance tax is substantially less than the $5.25 million federal applicable exclusion amount. By retaining the A/B provisions, but modifying them to reference the state death tax rather than the federal estate tax, state death taxes can be saved;
  • The couple has children from a previous marriage and wants to keep the amount to be distributed to husband’s children separate from the amount distributed to wife’s children (either at the first spouse’s death, the death of the surviving spouse, or both);
  • The couple wants to provide the surviving spouse with asset protection relating to the deceased spouse’s share of the estate. With proper drafting, the assets of the B Trust can be sheltered from the surviving spouse’s creditors;
  • The couple is concerned about the surviving spouse’s financial management abilities and may want to appoint a co-trustee to manage the assets allocated to the B Trust with the surviving spouse, or a sole successor trustee other than the surviving spouse;
  • The couple wants to provide protection for their children in the event the surviving spouse remarries. This provision would remove the surviving spouse as a trustee or beneficiary of the B trust, unless the surviving spouse convinces his or her new spouse to execute a prenuptial agreement in which the future spouse releases any financial interest in the B Trust assets.

As you can see, it is not an automatic decision to remove the A/B estate tax provisions from an existing Will or Trust or design a new estate plan without these provisions. It is necessary for the couple to consult with a knowledgeable estate planning attorney. Administration can be greatly simplified and savings realized by excluding the tax provisions. However, there are numerous tax and non-tax reasons why the provisions may need to be included or retained. Consult our website for a list of times and dates when we will be conducting 2013 Trust Tune-Up Webinars, in which we will discuss the need for attendees with existing estate plans to take advantage of our offer for a free review of their estate plan.

Many individuals are well-intentioned, but most New Year’s resolutions are forgotten by February, if not sooner. Help your clients follow through with at least one of their New Year’s resolutions by having them schedule a review of their estate plan now. They will thank you for your assistance.

Our law firm focuses on estate planning and administration for clients of all levels of wealth. We also offer trust administration and probate services. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up to date with information regarding tax developments as well as cutting edge planning strategies for persons of all wealth levels. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling our office.

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