How Tax Law Changes Can Impact Your Trust

If you’ve established an estate plan in the last few years, with the goal of avoiding estate taxes, you’ve likely read reports or heard through the grapevine, that the estate tax exemption has risen from $3.5 million to $5 million, and due to statutory increases is currently $5,250,000 for estates of those who pass away in 2013.

What Does This Mean For My Estate Planning? 

Many of our clients have asked: Is it time to unwind my A/B or credit shelter trusts? Should I consider doing away with my trusts altogether? It depends

on your situation.

Benefits Of Maintaining Your Trust:

Funding trusts, and providing dispositive provisions through trusts, are helpful in avoiding lengthy probate proceedings, which are open to public inspection. Other tools exist to avoid probate, but a trust is one of the simplest to achieve this purpose.

  • An A/B trust can reduce taxes. It divides into two separate funds upon the death of the individual. Fund B is funded first and uses the entire estate tax exemption, but for tax purposes, limits the surviving spouse’s control over those assets until the surviving spouse dies. Fund A is created with any amounts that exceed the tax exemption, and allow the surviving spouse to have more control over the Fund A assets. For estate tax purposes, Fund B property is not included in the second spouse’s estate; therefore, reducing the taxable estate.
  • An A/B trust also allows for a significant amount of flexibility to the surviving spouse and heirs. Conversely, this flexibility can also be used to achieve asset protection to reduce the vulnerability of assets to claims of beneficiaries’ creditors or the event of a second marriage, ensuring that assets efficiently pass to your intended beneficiaries. Making amendments to existing trust documents are relatively easy to execute, and can be as flexible as necessary, especially if minimizing estate taxes is not a main planning consideration.
  • Ultimately, maintaining the A/B trust documents is important in the event that tax laws change in the future. There is always the possibility that Congress will again lower the estate tax exemption – whether to raise revenue or to attempt to balance budgets. While we’d like to think this is unlikely, existing A/B trust documents (1) have the flexibility necessary to adjust for those situations, and (2) give surviving spouses the best options to avoid having to do tax planning under duress.

Much future planning will center on income tax planning, but the estate tax remains an issue to watch while Congress continues wrangling. Even with a high estate tax exemption, the use of trusts will continue to make sense for many families.

If you have questions about your estate planning documents, income tax planning, or would like to review the flexibility given to the surviving spouse in existing A/B trust documents, please don’t hesitate to contact me or any of the following Strauss Troy Trust | Estate Planning attorneys for assistance:

Mark Berliant
Tom Rink
Marty Butler
Pete Smith
Marshall Dosker
Tim Theissen
Larry Neuman
Bill Williamson