Some Questions We’re Being Asked a Lot Lately

APRIL 29, 2013 VOLUME 20 NUMBER 17
You probably have read that Congress has made big changes to the estate tax system. More accurately, Congress has made “permanent” the big (but piecemeal and temporary) changes introduced over the past decade. We hear a lot of questions from our clients about what those changes mean. Here are some of the more common questions we get asked:

Should I revoke the living trust I signed a few years ago? The answer is almost certainly no, but it might require some explanation.

Trusts (and here we generally mean revocable living trusts) have been useful for the past few decades, and help address a number of concerns. They can make it easier for you to avoid the necessity of probate of your estate. They can provide more efficient and clear-cut management of your assets if you become incapacitated. They can spell out any limitations on your heirs’ access to your estate after your death. And (especially for married couples) they can help minimize estate taxes — or at least they have traditionally been useful for that purpose.

The federal government’s change in estate tax limits means that very, very, few estates of decedents will pay any estate tax whatsoever. But does that mean that your trust will no longer be helpful?

Even though your estate will likely not be subject to any estate taxes, the other benefits provided by your living trust will continue to be available. Probate avoidance is still easier with a trust. So is protection of your assets in the event you become incapacitated. So is control over your children’s inheritance.

If you had not already created a living trust, the recent changes in tax law might make it less compelling for you to sign a trust today. But if you have already created your trust, there is little likelihood that you will be better off by revoking it. The only real downside to creating a trust (in most, nearly all cases) is the cost (our fees) and the difficulty of transferring assets into the trust (the “funding” process). You’ve already incurred both of those, so it probably makes little sense to undo your trust now.

Do my spouse and I still need a two-trust arrangement? It has been common in Arizona (and other community property states) for a husband and wife to create a single, joint trust that divides into two trusts upon the first death. Those trusts are sometimes called “survivors” and “decedents” trusts, or “family” and “marital”, or more simply A and B trusts. Many practitioners think they are outmoded now — and they might be right.

The recent tax law changes make permanent the concept of “portability” of the estate tax exemption. That means that when one spouse dies, the surviving spouse gets to keep the deceased spouse’s $5 million estate tax exemption (it’s actually even better than that, since the $5 million figure is indexed for inflation and has already risen to $5.25 million). No fancy trusts are necessary to allow a combined estate of up to $10.5 million (or more) to completely escape federal estate tax.

For a number of reasons, though, some lawyers favor keeping the two-trust split in place. There might be a state estate tax to consider (there isn’t in Arizona, but perhaps you have property in another state where there is an estate tax). There is still the generation-skipping tax issue, if you are putting money in trust for your children (which we favor) or leaving money directly to grandchildren.

This issue takes a lot of individualized consideration. The answer may depend not only on the size of your estate, but also who you intend to leave your money to and whether you will be leaving it in trust. Suffice it to say that married couples with combined estates of well under the $5 million threshold probably don’t need the two-trust arrangement, while couples worth more than twice the $5 million figure likely do. But even those generalizations are uncertain — your mileage definitely might vary. Talk to your lawyer.

What if my spouse died several years ago, and an irrevocable trust was set up — do I still need to keep it going? It might well turn out that you don’t, but you may not have control over the question.

For couples worth more than a few hundred thousand dollars a decade ago, the division into two trusts was commonplace. If one spouse has already died the division might well have already taken place. If so, the irrevocable trust files separate tax returns, has its own EIN (Employer Identification Number — the trust’s equivalent of a Social Security Number) and has requirements that some form of accounting information is provided to the ultimate beneficiaries. Would it be advisable (or even possible) to terminate that trust?

It might, particularly if the total value of the irrevocable trust and the living spouse’s own estate does not exceed $5 million. Recent changes in Arizona law might make it easier to terminate the trust and save the cost and hassle of administering it. But it is not always easy to terminate the irrevocable trust, and there may be some costs associated with doing so. Talk to your lawyer. You might find yourself discussing merger, termination or “decanting” of the irrevocable trust.

Are these changes really permanent, or will we be revisiting everything again in two years? This really looks permanent — or at least permanent for the next decade or two. Can Congress revisit the estate tax? Yes, of course. Have they done so over the past fifteen years? Yes, repeatedly. Is there any move afoot to make further changes? Yes, some politicians talk about eliminating the estate tax altogether. But even with all that said, there is little indication that any serious changes are going to be discussed in the next few years. And even if Congress significantly lowered the estate tax limit, the result would be that the tax could affect a handful more than the half-percent (or so) of people who now need to worry about estate taxes.

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3 Responses

  1. From an estate tax planning standpoint, we’ve found that the disclaimer trust provides the flexibility of the AB trust should it be necessary, while not forcing a spouse into an unnecessary AB trust that is cumbersome to administer.

    However, we just recently filed a Form 706 for the portability of the deceased spouse’s estate tax exemption. The downside to this, is if the survivor remarries that portability of the exemption may be lost, and the AB trust may still be the best vehicle for estate tax planning. With the disclaimer you have only 9 months to make the disclaimer. It is unlikely that the survivor will remarry within this time frame.

    Could you address the issue of disclaimer vs. AB trust and the portability issue in the future?

  2. Ray Vasri

     /  July 14, 2015

    Great Article. Thanks for the info, super helpful. Does anyone know where I can find a blank 706 Form to fill out?

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