Recent Estate Tax Changes & Your Living Trust

By Michael K. Elson, Attorney at Law


A good Living Trust is drafted and tailored to the client’s estate, taking into account current and anticipated future tax laws. Aside from the reduction or elimination of estate and capital gains taxes, a Living Trust avoids probate on all assets properly transferred to the trust. In addition, the trust and supporting documents ensure the avoidance of court control of your assets should you become temporarily or permanently incapacitated.

For decades, the use of an A-B Living Trust has enabled married couples to effectively double their estate tax exemption and pass on hundreds of thousands or millions of dollars more to their heirs. Additionally, an A-B or A-B-C Living Trust may provide important non-tax related asset protection benefits to a surviving spouse and heirs. However, in light of recent estate tax changes, any trust requiring a mandatory A-B split should be carefully considered because there could be capital gains tax implications, without the usual overriding benefit of estate tax savings.

The temporary tax laws passed by Congress at the end of 2010 set the 2011 and 2012 estate tax exemption and gift tax exemption at $5 million per person, an estate tax rate of 35%, and implemented portability of unused estate tax exclusions. For those with estates worth several million dollars, all of this appeared to be good news. However, in 2013 the temporary law was set to expire whereby the estate tax exemption was to be only $1 million with a tax rate of nearly 50%. As of January 1, 2013, the $5 million exclusion (with small annual increases) from estate tax had been extended for an unknown time period, and the previous estate tax rate of 35% for the 2011-2012 period changed to 40% for 2013 through 2015. Then in 2015, the estate tax exemption was $5,430,000 and the 2015 annual gift tax exclusion was $14,000. Last year the 2016 estate tax exemption had been raised slighly to $5.45 million, and the 2016 annual gift tax exclusion remained at $14,000. This year in 2017 the federal estate tax exemption has raised slightly to $5.49 million. Finally, in conjuction with or without a QTIP trust, utilizing a portability election can be a very useful course of action, however the election must be used in a timely fashion and very cautiously as there are many potential pitfalls and uncertainties with the portability laws.

Under the existing laws, it is possible that an existing trust requiring a mandatory A-B split may create undesirable capital gains consequences, without the benefit of any estate tax savings. In particular, couples with a moderately sized estate should strongly consider having their trust reviewed if it requires a mandatory A-B split after the passing of the first spouse. On the other hand, no action is required for couples with a “disclaimer” trust, also known as an A-B Disclaimer Trust. This is because the great flexibility of the disclaimer trust allows the surviving spouse a 9 month period, from the death of the first spouse, to decide whether or not implementing the A-B split is beneficial. With a disclaimer trust, all of the A-B provisions are preserved for use. During this 9 month period, the surviving spouse can decide whether or not to utilize these provisions, based on the size of the estate and tax rates in effect at the time. Note, if spouses wish to have a part of the trust become irrevocable after the death of one spouse, a well drafted QTIP provision will allow certain trust assets to be preserved for the heirs of the decedent spouse, without any negative tax consequences, regardless of whether the estate would otherwise be subject to tax or not. The QTIP trust provision is useful in certain instances, for example when there is concern that a surviving spouse may later change the trust terms and estate plan to disinherit certain beneficiaries.

For all of these reasons, the recent tax law changes re-enforce the beneficial flexibility and usefulness of the A-B Disclaimer Trust. Estate tax regulations change frequently and are difficult to predict. Given the degree of government debt and expenditures, it is hard to imagine that taxes will stay the same or decrease over time. Therefore, timely and proper estate planning will continue to be an important tool for those who wish to leave as much as they can for their heirs.


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Michael K. Elson is the principal of The Law Offices of Michael K. Elson which is a leading firm in estate planning and asset protection law. He may be reached at (818) 763-8831 or by visiting www.LimitLiability.com

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