Change Your Trust Now! – Make it More Simple and MORE EFFECTIVE!

November 13, 2018

Married couples finally have the opportunity to make their estate planning documents simple, yet more effective!  Two recent developments dramatically changed estate planning: the new, higher estate tax exemption under The Tax Cuts and Jobs Act of 2017 and the portability of the exemption.  Since 2010, estate tax exemptions are now portable between spouses, which means a deceased spouse’s unused federal estate tax exemption may be used by the surviving spouse.  Those two changes have drastically reduced the application of the federal estate tax, thereby helping shift the focus to state and federal income tax planning.

The Old Document Format: Credit Shelter and Marital Trusts

Prior to portability and a higher exemption, wills and trusts for spouses had to be drafted in a rather complex manner.  The trust of the first spouse to pass put trust assets into a “credit shelter” trust, which utilized that spouse’s estate exemption.  Any remaining assets were put into a “marital” trust, which avoided estate tax since transfers to spouses are estate tax-free.  This led to problematic results, including: 1.) the complexity of dealing with two irrevocable trusts after the first spouse passes away; 2.) less than optimal income tax results; and 3.) the possibility of overfunding the credit shelter trust for state estate tax purposes.

New, Preferred Document Format

The portable, higher federal estate tax exemption permits wills and trusts to be drafted with a very simple format: all to the surviving spouse, but with an option to the survivor to utilize the decedent’s estate tax exemption by disclaiming all or a portion of the inherited amount into a “credit shelter” trust, if desired.  This new, mainstream approach can be further refined by implementing the following in documents:

  • Outright to Spouse or Marital Trust.   All assets of the decedent may be given outright to the surviving spouse or placed into a marital trust for the surviving spouse’s benefit.  This can be done to protect assets if the decedent and survivor were in a second marriage or the survivor remarries.
  • Disclaimer Credit Shelter Trust.   If the surviving spouse chooses to disclaim (usually for tax reasons) any assets received from the decedent, they are placed into a “disclaimer trust,” which acts like a credit shelter trust.  That action forces the use of the decedent’s federal and state estate tax exemptions.  Most state exemptions are not portable, so the disclaimer trust may prove critical in planning to minimize state estate taxes.

New, Preferred Disclaimer Format: Better Income Tax Planning

When any asset or investment is sold, the taxable gain is measured by subtracting the asset’s purchase price, or “basis,” from the selling price.  The basis of assets inherited from a decedent is “stepped up” to fair market value at the decedent’s death.  The new “disclaimer” format provides the opportunity for TWO income tax basis “step ups.”  One when the decedent’s trust gives all assets to the surviving spouse.  A second basis step can occur when the surviving spouse passes away and leaves the same assets to children.  The new format is preferred given the opportunity for better income tax basis planning.

Spouses like simple solutions and that is now possible – a revocable trust that gives all assets to the survivor and survivor decides whether to implement more advanced planning.  Better income tax planning can be achieved with this new, preferred trust format!

Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning.  Mike shares his deep estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members.  Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.