Electing portability v. AB trust planning
BACK TO SCHOOL IMMUNIZATION CLINIC
WHEN: 8:30 a.m. to 4 p.m. today through Aug. 4 WHERE: Health Department auditorium, 2200 W. 28th St. GOING ON: Students must have proof of all required immunizations or a valid exemption in order to attend school; parents should bring a current immunization record, guardianship paperwork (if not the parent); if child is covered by AHCCCS/Kids Care, an ID card or letter will need to be produced; no child will be turned away for inability to pay COST: $10 visit fee, vaccines included (cash only)
GALACTIC STARVEYORS VBS
WHEN: Dinner 5:30 p.m.; VBS 6 to 8 p.m. through Thursday WHERE: Foothills Southern Baptist Church, 13148 E. 40th St. GOING ON: Children ages 4 through sixth-grade are invited to enjoy free games, crafts, snacks, music, Bible studies and more during the Galactic Starveyors vacation Bible school summer Bible camp INFO: To register, call (928) 342-3557 or email powerkids@ foothillsfamily.net/vbs
BIG APPLE ADVENTURE VBS
WHEN: 6:30 to 8:30 p.m. today through Wednesday WHERE: Faith Horizon Baptist Church, 8519 E. 24th St. GOING ON: Big apple adventure vacation Bible school has a New York theme and includes music, Bible activities, missions and crafts; for children prekindergarten through sixth grade INFO: Contact the church at faithhorizonbc@yahoo.com or www.faithhorizonbc.org
Most people are at least vaguely aware that estate taxes may be due at death. Here is a summary of three important concepts to understand about estate taxes as they relate to trusts and estate planning in general.
Estate tax
When someone passes away, the property held in his name is referred to as his estate. The tax owed on the value of the property in his estate before it can be passed to his beneficiaries is called the estate tax. The percentage an estate would have to pay would range based on the value of the estate (which tax bracket the estate fell into). For brevity, the article only addresses highest estate bracket.
Many of my clients are familiar with the threshold amount of $600,000. Because for 14 years (1987-2001), the estate tax only affected individuals who died owning assets of approximately $600,000 or more. In other words, during that period, any amount over approximately $600,000 would be taxed up to 55 percent. For married couples that held all their property jointly, the exemption was effectively $600,000 for the couple. This is because the IRS allows any amounts inherited by the spouse to be exempt, but at the same time the deceased spouse’s estate would forfeit its exemption. Thus, in theory a combined estate of $1.2 million ($600,000 by each spouse), should get a $1.2 million exemption and not owe any estate tax. The reality was the first spouse to die often forfeited his exemption by leaving his estate to his wife, and upon the wife’s death, her estate would be taxed on every dollar over her $600,000 exemption.
Consequently, estate planning attorneys were very busy helping their clients minimize the amount their estate would be taxed upon their death. One very popular way for married couples was the AB trust.
The trust was designed to split into A and B shares upon the death of the first spouse. This would allow the couple to place up to $600,000 in one trust (typically the B trust) and the remainder would be held in the A trust. The B trust will apply the estate tax exemption, and thus, be free from estate taxes. The B trust would name the surviving spouse as the beneficiary so she could still use the assets. The remainder would be held by the A trust which was completely controlled by the living spouse. When she died, her estate tax exemption would be applied to her, thereby accomplishing the goal of using both spouses individual exemptions and allowing the surviving spouse to benefit from her husband’s share of the couple’s property until she died.
However, times have changed and the estate tax exemption has increased from $600,000 per person to $5.49 million per person. Accordingly, unless a couple’s combined estate is over $5.49 million, there is no tax benefit of an AB trust. An AB trust that has not been recently updated to keep up with the law would likely cause the surviving spouse the administrative burden of retitling the couple’s assets and filing tax returns for A and B shares of the trust, which would result in an expense that yields no tax advantages. Additionally, assets held in the B share of the trust would not get a step-up in basis at the death of the second spouse, which could result in higher capital gains taxed for the beneficiaries of the trust.
Current planning with portability options
We don’t know if the estate tax exemption will stay at $5.49 million. Currently, there is no expiration for that law. In fact, that amount increases each year indexed by inflation.
What about married couples with estates that could potentially reach $5.49 million? In those cases, portability is a very good alternative to AB trust planning. Portability of the estate tax exemption between married couples was made permanent for 2013 and future years. What does “portability” of the estate tax exemption mean? Portability is the option to have the unused portion of the deceased spouse’s estate tax exemption transferred and added to the surviving spouse’s estate tax exemption by timely filing a federal estate tax return, IRS Form 706.
Prior to the enactment of portability, the only way married couples could pass on two times the estate tax exemption to their heirs was to use the AB trust system. With portability, however, dividing the deceased spouse’s estate between the A trust and B trust for estate tax purposes is no longer necessary. AB trust planning is still a very viable option for couples who are looking for creditor protection or to protect the trust from being changed by the surviving spouse after the first spouse’s death, but those topics are outside the scope of this article.
The biggest point regarding this article is times have changed and trusts, like cars, need to be maintained to function properly. If you have a trust, you should have it reviewed regularly to make sure it accomplishes your objectives in the current legal landscape.
Shawn Garner hosts free monthly seminars to how to protect your family and avoid guardianship, conservatorship, and probate court proceedings using a living trust. The next seminars are 10:30 a.m. Thursday at Deason Garner Office and 10:30 a.m. Saturday at the Foothills Library. To RSVP, call (928) 783-4575 or visit YumaEstatePlanning.com.