Estate Planning Word Circle Concept White Center

Background: A very common estate planning tactic over the years for married couples has been the utilization of the family revocable trust which splits into multiple trusts at the death of the first spouse. This split into the A/B trust (commonly called the Survivor’s Trust and the Decedent’s Trust, respectively) or A/B/C trust (commonly called the Survivor’s Trust, the QTIP Trust and the Decedent’s Trust, respectively) at the death of the first spouse has long been utilized as an estate planning device to minimize the possibility of estate taxes in the event that the second to die spouse wound up with a taxable estate in excess of his or her lifetime applicable exclusion amount available at death.

Such a split has also offered the added advantage that it placed some restraints on the surviving spouse and his or her unfettered access to the assets allocated to the Decedent’s Trust as it would generally insure that the property in the Decedent’s Trust would wind up in the hands of the residual beneficiaries that the husband and wife agreed to when they executed the trust instrument. In addition, it also provided the surviving spouse with creditor protection from creditors with respect to property allocated to the Decedent’s Trust.

However, certain tax law changes starting in 2010 have called into question by some whether the split trust concept still holds sway in light of the increase of the indexed lifetime exclusion amount and the introduction of the portability concept into law as discussed below.

The 2012 Tax Relief Act made permanent (relatively speaking, of course) the lifetime amount excludable from federal estate and gift tax for each person of $5,000,000 subject to annual inflation adjustments. The applicable exclusion amount for 2014 is $5,340,000, but adjustable upward for inflation in future years for living spouses, which means that a couple now has the ability for calendar year 2014 to shield $10,680,000 from federal estate tax. Depending on inflation rates, this amount will likely increase in future years. For example, with a 3% annual inflation rate, the exclusion amount per person would grow to $6,340,000 in 2020. The IRS has recently announced that the exclusion amount for 2015 has been increased to $5,430,000 per person.

With the Tax Relief Act of 2010, the portability of the unused portion of the lifetime applicable exclusion amount of the deceased spouse and its effective transfer by proper and timely filed election by the surviving spouse was enacted into law and then made permanent by the Taxpayer Relief Act of 2012.

The introduction of portability and the increased lifetime exclusion amount caused many commentators in the estate planning field to predict that, for most people, the viability of the Survivor’s Trust/Decedent’s Trust approach was on the wane and that the single trust approach or limited estate planning would follow.

So these two changes in tax law caused a general reexamination of the need for the split trust concept being utilized going forward, particularly for couples with combined assets up to $10,000,000. For example, portability can, under certain circumstances, enable a couple with assets in that dollar range to avoid federal estate tax without the necessity of utilizing the split trust concept, thereby simplifying life after the death of the first spouse without a need to split, segregate assets and file separate federal and state tax returns for a Decedent’s Trust.

Of course, circumstances such as creditor protection, providing for the deceased spouse’s children from a prior marriage and possible remarriage by the surviving spouse bring other issues and limitations to bear on the use of portability, which can easily negate its benefits in certain factual circumstances. Also the deceased spouse’s unused applicable exclusion amount can be utilized by the surviving spouse for both estate and gift tax purposes. But portability does not apply to the GST (Generation Skipping Tax).

(continued in Part II and Part III in a few days)

Michael W. Margrave