Estate plans drawn prior to 2011 may be outdated because estate tax laws were dramatically changed in 2010.  There were many changes, but perhaps the three most significant changes to existing laws are discussed below.

First, the estate tax exclusion amount (the amount of your estate on which you do not pay estate tax) was increased to $5,000,000 and linked to inflation.  State exclusions vary, but the federal exclusion for 2015 is $5,430,000.  Second, the gift tax exclusion was unified with (linked to) the estate tax exclusion.  Finally, the concept of “Portability” was introduced.  These new laws provide more flexibility in estate, gift, and generation skipping transfer tax planning, and better income tax results.  To take advantage of these new laws, new approaches to estate planning must be considered.

Prior to Portability, if a husband and wife did not properly divide their assets, part of the first decedent’s estate exclusion could have been lost with the death of the first spouse.  Under the new law, if you do not use your own exclusion, either during your life or at death, then your surviving spouse can carry over that unused exclusion amount and use it later as a gift or estate tax exclusion.  Portability, which can only be elected by timely filing a Federal Estate Tax Return (Form 706), allows you to focus on allocating assets based on practical considerations, such as making sure the survivor’s access to assets is not unnecessarily restricted through a trust.

The new tax laws also changed the approach to using what are commonly referred to as “AB” trusts.  To attempt to utilize the first decedent’s estate exclusion (between a husband and a wife), many wills and trusts were drafted to include a Marital Trust (A trust) and a Credit Shelter or Family Trust (B trust).  The Credit Shelter Trust bypasses the estate of the surviving spouse, thus utilizing the first decedent’s estate exclusion.  Portability may eliminate the need for a Credit Shelter Trust on the first decedent’s death.  New planning approaches pass all of the estate of the first decedent to the surviving spouse, or into a trust for the surviving spouse.  Another option allows the surviving spouse to “disclaim” a portion of the first decedent’s estate.  The decedent’s estate would then direct (the disclaiming surviving spouse cannot do so) that the disclaimed assets pass to a Credit Shelter Trust, effectively planning the estate of the first decedent after the first decedent’s death.  These new planning alternatives may also yield better income tax results.

Many assets that are inherited from a decedent receive a stepped-up basis.  This means that the new tax basis for calculating gain or loss is artificially increased to the fair market value at the date of death of the decedent.  For example, assume a person bought a share of stock for $100 ten years before death.  If the share of stock is worth $1,000 and the person sells the stock for $1,000, then that sale would generate a capital gain in the amount of $900, which would be subject to income tax.  If the person dies owning that same share of stock and the beneficiary receives a stepped-up basis in that stock, then the beneficiary would have a new tax basis of $1,000, and that same sale of stock would not yield any capital gain.  If that same share of stock is instead received by a Credit Shelter Trust on the death of the first spouse, the tax basis of that share of stock is stepped-up to $1,000.  However, on the death of the surviving spouse the tax basis of that share of stock is not stepped-up again since that share of stock is not included in the surviving spouse’s estate for federal estate tax purposes.  The new planning alternatives discussed in this article may allow for a second step-up in the tax basis of that share of stock on the death of the surviving spouse.  If the assets are included in the surviving spouse’s estate for federal estate tax purposes, then a second step-up can often be obtained.  Of course, there are exceptions, such as IRAs which do not receive any step-up.  Generation skipping transfer tax (GST) may also require special attention and planning.

Estate plans of married couples should be reviewed from both a federal and state law standpoint to determine whether these new planning approaches allow a survivor to have increased access to funds after the death of one spouse and to maximize income tax benefits.  This is particularly true of estate plans that require the use of a Credit Shelter Trust on the death of the first spouse.  While these new approaches may not be best for everyone, they could allow a couple to retain control of their assets until the death of the surviving spouse, with full use of estate tax exclusions and better income tax results.  As a final caution, all aspects of a person’s estate plan should be coordinated by all of their legal and financial professionals to obtain the best results.

DISCLAIMER: This article is intended as a starting point for discussion.  It does not create an attorney client relationship with this firm or its attorneys and is not intended as legal advice to a reader of this article.  No one should act or fail to in reliance on this article without seeking professional advice, and this article, without a signed written engagement letter with the author does not create such a relationship.

© David M. Silberstein, Esq., All Rights Reserved, 2015

David M. Silberstein, Esq., is the founder of the Silberstein Law Firm, PLLC, with offices in Sarasota, Florida, and Lakewood Ranch, Florida.  David is a member of the Florida Bar, Colorado Bar, and New Mexico Bar.  He can be reached at 1515 Ringling Blvd., Suite 860, Sarasota, Florida 34236, 941-953-4400.  More information about the firm and David can be obtained from www.silbersteinlawfirm.com.