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 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 at $5 million, an estate tax rate of 35%, and allow portability of unused estate tax exclusions. For those with estates worth several million dollars, this may appear to be good news. However, in 2013 the temporary law will expire and the estate tax exemption is set for $1 million with a tax rate of nearly 50%.
Under the temporary law, 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.
For 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 after 2013. 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.