Year End Estate Planning Tip #1 – Check Your Estate Tax Planning

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season.  One area that married couples should revisit is their estate tax planning.

Do You Still Have “AB Trust” Planning in Your Estate Plan?

If you’re married and you haven’t had your estate plan reviewed since before January 2, 2013, by an experienced estate planning lawyer, then pull your documents out of the drawer, dust them off, and take a closer look at their trust provisions.  Do they contain terms such as “Marital Trust,” “QTIP Trust,” “Spousal Trust,” “A Trust,” “Family Trust,” “Credit Shelter Trust,” or “B Trust”? 

If so, then your revocable trust contains estate tax planning provisions that were required in most estate plans before January 2, 2013.  Now, you may not need this type of planning since the federal estate tax exemption has been fixed at $5 million per person adjusted for inflation (the exemption is $5.34 million in 2014 and expected to increase to $5.42 million in 2015). 

Aside from this, the federal estate tax exemption is also “portable” between married couples (including legally married same-sex couples), meaning that when one of a married couple dies, the survivor may be able to get the right to use their deceased spouse’s unused estate tax exemption and so, without any complicated estate tax planning, pass $10 million+ to the deceased spouse’s heirs and the survivor’s heirs federal estate-tax free.

Do You Still Need “AB Trust” Planning in Your Estate Plan?

With that said, do you still need to include “AB Trust” estate tax planning in your estate plan?  The answer to this question depends on several factors, including:

·         Are the combined estates of you and your spouse under $5 million?  If the combined value of the estates of you and your spouse is under $5 million, then you will not need to worry about federal estate taxes (at least for now).  Nonetheless, there may be other reasons to keep your “AB Trust” planning in place as discussed below.

·         Does your state still collect a state estate tax?  – If your state still collects a state estate tax and your state’s exemption is less than the federal exemption, then “AB Trust” planning (or perhaps “ABC Trust” planning) may be required to defer payment of both state estate taxes and federal estate taxes until after the death of the surviving spouse.  (Note that this will not be the case in Delaware and Hawaii since the exemptions in these states currently match the federal exemption.  The exemptions in Maryland and New York will also match the federal exemption in the future, but not until 2019.) 

·         Do you and your spouse have different final beneficiaries of your estates?  If you and your spouse have different final beneficiaries of your estates (for example, you want your estate to ultimately pass to your children while your spouse wants their estate to ultimately pass to their siblings or their children), then “AB Trust” planning may be necessary to insure that the final estate planning goals of each spouse are met.

·         Do you and your spouse want to create a dynasty trust that will continue for many generations?  Even if the combined value of the estates of you and your spouse is under $10 million, if you want to take advantage of both spouses’ generation-skipping transfer tax (“GSTT”) exemptions to create a lasting legacy for future generations, then “AB Trust” planning may be appropriate because the GSTT exemption is not portable between married spouses.  In other words, if the combined values of the estates of you and your spouse is $10 million or less, then you may want to keep “AB Trust” planning in your estate plan so that you can fully use each spouse’s GSTT exemption for a dynasty trust for the benefit of your children, their children, and their children’s children.

In addition, there are many other factors and options to consider that an experienced estate planning attorney can explain.

What Should You Do?

If you’re married and your current estate plan includes “AB Trust” planning but you’re not sure if you should keep it in your plan, then make an appointment with an experienced estate planning attorney to discuss all of your options.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.