Disappearance of estate tax means good time to review documents

Disappearance of estate tax means good time to review documents

Already, some high profile estates drew attention this year to the fact that, for the first time since 1915, there is no federal estate tax.

While the suspension of the estate tax may serve as a temporary benefit for heirs, it could also cause complications for investors who have included trusts in their estate planning. Specifically, the use of an AB Trust may be compromised due to the absence of the estate tax.

Many married couples use the AB Trust as a strategy to postpone payment of estate taxes.

For example, a couple might set up an AB Trust and name each other beneficiaries. When the first spouse dies, the A Trust would contain the deceased spouse’s assets over and above the allowed tax exemption. The B Trust would hold the assets up to the amount covered by the prevailing exemption amount. The money in the B Trust would no longer be considered part of the estate and may be inherited tax free. By dividing up the assets in this way, the couple may be able to maximize the use of the federal estate tax exemption for each spouse and lessen or eliminate estate taxes for their final heirs.

Many such trusts include “formula” clauses, which are based on the current estate tax exemption amount. For example, a clause may provide that the spouse benefit from a trust in the amount of the maximum estate tax exemption. If there is no estate tax, that amount is effectively zero, and the entire estate might pass directly to the secondary beneficiaries — such as children — which might not be what the spouse intended.

If you have clients who are in poor health and who have established trusts in their estate plan, you may wish to contact them and suggest they consult with an estate planning attorney to determine if any changes are needed.

More in: Estate and Wealth Transfer, Taxes