Pearson Butler office

More Reasons for Clients to Review Their Estate Plans

Last month, we let you know that Congress let the United States go off the fiscal cliff, only to come to the rescue in the early morning hours of January 2, 2013, with the passage of the American Taxpayer Relief Act of 2012 (“ATRA”). To review, ATRA makes most of the provisions of the previous estate tax law permanent. The amount that can be passed free of gift tax and estate tax is indexed for inflation, with the figure set at $5.25 million for 2013. The maximum gift and estate tax rate were increased from 35% to 40%. Finally, ATRA makes the portability of the first deceased spouse’s unused applicable exclusion amount permanent.

We also covered how, in many instances, the retention of the $5+ million exclusion amount and the availability of portability may make it attractive for many couples to revise their estate plans to remove the complex A/B trust funding formula from their wills or trust(s). This would make administration of the estate easier for the surviving spouse, should save on trust administration costs, and would avoid the necessity of filing an additional trust income tax return for the B Trust every year after the death of the first spouse to die. However, electing portability does require the filing of a federal estate tax return (Form 706) even if no estate tax is due upon the death of the first spouse to die. Failure to timely file the Form 706 forecloses the ability of the surviving spouse (or her executor upon her death) from taking advantage of the portability provisions.

For married couples with estates in excess of $5 million, there are many reasons they may want to elect not to rely on portability as a means of saving on federal estate taxes. First, the state in which they reside (or own real property) may impose a state estate or inheritance tax. The amount that can pass free of state estate or inheritance tax may be lower than the federal exclusion amount, requiring complex planning (usually involving a variation of the A/B Trust formula tax planning) to maximize both federal and state death tax savings. Even if the size of a married couple’s estate is under $5 million, it may be greater than the amount that can pass free of state estate or inheritance tax, which would require special planning to avoid or reduce the state death taxes.

ATRA, as well as the implementation of the Affordable Care Act, will cause many individual’s federal and state income taxes to increase in 2013. The income taxes on trusts and estates will also be increasing. Going forward, there may be strategic opportunities to save on income taxes by terminating a trust or estate, splitting income between individuals and trusts, or by structuring a trust in a manner so that its income will be taxed in the desired manner (either to the trust itself or to its owner or beneficiaries).

Couples with estates of any size may wish to provide protection to their children in the event the surviving spouse remarries. The deceased spouse may want to assure that his or her assets do not end up belonging to their surviving spouse’s new spouse or the new spouse’s children. In these circumstances, planning can be incorporated into the couple’s estate plan to place limits on the deceased spouse’s share of the estate unless the new spouse agrees to enter into a pre-nuptial agreement limiting his or her access to the assets originating from the deceased spouse’s share. This type of planning would not be achieved easily if portability is elected and all the couple’s assets are distributed directly to the surviving spouse.

More and more couples are growing concerned about the cost of long-term care should the surviving spouse require care in a nursing home, assisted living facility, or even at home. These couples are also concerned about obtaining some degree of asset protection for the surviving spouse in the event he or she is having his or her assets pursued by a creditor. But, by properly structuring the estate plan, it is possible to protect against the ravages of long-term care and judgment creditors of the surviving spouse.

Finally, some clients are interested in distributing the share of the deceased spouse to children and grandchildren upon the death of the first spouse, but doing so in a manner that offers the child divorce protection or asset protection. Even in those cases where distributions are being delayed until the death of the surviving spouse, many couples desire to protect the children’s inheritances from being eroded. The estate plan of the couple can be drafted in a manner which will protect it from the reach of divorcing spouses of children and grandchildren, as well as from their general creditors. The trust may even be drafted to achieve a variety of goals including 1) to create incentives for the children or grandchildren to behave in a desired manner, 2) to have the inheritance supervised in the case of a child or grandchild with money management problems or an addiction that will affect his her judgment (such as gambling or alcohol or drug addictions), or 3) estate tax protection to keep the assets from being included in the children’s estates (for estate tax purposes) at the eventual deaths of the children.

As we stated last month, the passage of AFTA has created many reasons for married couples to have their estate plans reviewed and perhaps simplify administration by eliminating the complex A/B Trust tax formula in their current will or trust. There is also a myriad of reasons that, after reviewing their estate plans with a competent estate planning attorney, would cause the couple to leave these tax provisions in their estate plans. To further complicate matters, couples need to consider state death tax, federal and state income tax, and non-tax planning considerations in deciding whether their estate plan needs to be updated.

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.