Planning for the New Year.
Everyone heaved a sigh of relief when Congress quickly passed the two year extension of the Bush tax cuts through 2012. Once again, the federal estate tax exemption was changed from what it was the year before, and what it was scheduled to become in 2011. The bill increased the estate tax exemption to $5,000,000 per person, or $10,000,000 per couple. For most of us, that means that our heirs will not have to pay any federal taxes on the transfer of the estate property.
However, the changes in estate tax exemptions over the last decade have also created some problems for existing estate plans. The estate tax exemption has risen from $600,000 to $5,000,000. The exemption amount has changed each of the last five years. For couples who have created A-B trusts, the terms of which provide that the trust assets be allocated to two shares when a spouse dies, the language in the trusts can have the effect of placing all of the trust assets in the “B” trust, or decedent’s share of the trust estate. This will leave the survivor without any assets of their own, and a dependence on decedent’s share of the trust estate. While the surviving spouse usually has the right to receive income from the decedent’s share, there are restrictions on the survivor’s ability to withdraw and use the assets assigned to the decedent’s share of the estate.
In the meanwhile, real property values have declined. Assumptions about net worth five years ago are no longer valid. Yet couples made estate plans that, if anything, assumed that their net worth was going to rise, or at least maintain its current value. If your net worth has gone down in the last five years, and you have not had your estate plan reviewed, there is a likelihood of the trust requiring that more property be sheltered in a decedent’s trust than is necessary. The survivor may find that they do have access to the resources that they need.
ACTION ITEM: Have your family trust documents reviewed by competent legal counsel to make sure that your funding formulas are not so restrictive on the surviving spouse. Most estate these days don’t need to use the A-B trust structure to avoid estate taxes. Since most married couples do not want to interfere with the survivor’s enjoyment of the trust estate during their lifetimes, the traditional structures no longer as useful.
By Christopher C. Jones © Jan 2011
