With the recent increase in the estate and gift tax exemption amount to $11,400,000 (the “Exemption Amount”), equivalent to a credit amount of $4,560,000(40% of $11,400,000 ) against the estate tax, VERY few estates will be subject to the federal estate tax. Of course, Congress could have a different idea and that amount could be reduced with future elections. Further the amount automatically reverts to the $5 million Exemption Amount (plus an inflation factor), equivalent to a credit amount of $2 million (40% of $5 million) against the estate tax, in 2026. Nevertheless, fewer and fewer people are subject to the federal estate tax.
Unfortunately, many individuals who used to be subject to estate tax, especially when the Exemption Amount was only $600,000 or $1million, have not reviewed their documents in many years. Further, with the enactment of portability (discussed in a prior blog), these documents may be outdated and can cause headaches at the death of one spouse.
Prior to portability, practitioners generally created a trust for each spouse so that each spouse could take advantage of each of their Exemption Amounts. Usually a Family Trust (or sometimes called an A or B trust) was funded with the Exemption Amount (for example $600,000) with the spouse being a beneficiary but not having complete control (distributions based on health, education, maintenance and support in reaonsable comfort) and the balance would be distributed into a marital trust or outright to or for the benefit of the surviving spouse.
In the above scenario, if a decedent’s estate was valued at 1.5 million, via a formula, $600,000 (the Exemption Amount) would fund the Family Trust and $900,000 would fund the marital portion. As the marital portion was fully deductible and the exemption was fully utilized, no estate tax would be incurred at the date of the first spouse’s death. Then, upon the surviving spouse’s death, the Marital Trust would be included in the surviving spouse’s estate for tax purposes and the surviving spouse would be able to use their own Exemption Amount. Because of the restrictions on the spouse’s rights in the Family trust, the Family Trust and its appreciation would NOT be included in the surviving spouse’s estate for estate tax purposes.
Against this background, as the Exemption Amount increases, the marital portion becomes smaller unless a change in drafting occurs. For example, assume in 2019 a spouse has 5 million in their trust and the trust is drafted as noted above. The total $5 million will fund the Family Trust and NOTHING will go outright to the spouse or in a marital trust. While the Family Trust can be used for the surviving spouse’s benefit, the surviving spouse does not have complete control which may be something that was not anticipated at the time of the drafting.
With portability and the ability to use a predeceased spouse’s unused Exemption Amount without the necessity of completing and funding a separate trust, all documents should be reviewed. In many cases the existing trusts may still be utilized, but, in many cases, estate planning can be simplified.
ADVICE: Take time to review your documents and make sure you understand the general consequences of the documents. If you do not understand, then have your attorney explain the documents. Many times this author has met with clients who have documents and they are shocked and surprised as to what happens at their death. They may have changed circumstances, forgotten what they did before or just did not understand at the time of the original meeting. Many clients are intimidated by attorneys and do not ask all the questions they have.
WORD OF THE WEEK: Beneficiary, as defined under the trust code, is a person who has a present or future beneficial interest in a trust. The trust code differentiates between “beneficiaries” and “qualified beneficiaries”. Trustees generally have more duties to qualified beneficiaries than a beneficiary. Nevertheless, even if you are “only” a beneficiary, the trustee owes you certain duties. If you are lucky enough to be either a beneficiary or a qualified beneficiary of a trust, then be sure you understand your rights in the trust.
GENEROSITY IS A KEY TO HAPPINESS…REACH OUT AND HELP SOMEONE TODAY! 😎