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Important Tax Law Changes Could Impact Your Estate Plan

By: Brad H. Milhauser, Esq

The American Taxpayer Relief Act of 2012 (ATRA) raised the federal estate tax exemption to $5 million per individual which is indexed for inflation. Due to the inflation adjusted exemption, a married couple can transfer almost $11,000,000, estate tax free. ATRA also made permanent “portability” which allows the surviving spouse to “port” the unused estate tax exemption of the first spouse to die, and tack it onto his or her own exemption.

It is these two tax law changes under ATRA that could significantly impact your estate plan. For nearly all Americans, the focus for estate planning has shifted from planning for the estate tax to planning for income tax.

For years, the conventional wisdom for married couples was to establish a credit shelter and marital trust (or A/B trust), with the intent being to shelter the first deceased spouse’s exemption by allocating the applicable exemption amount to the credit shelter trust. Any overage would fall to the marital trust and in the end all estate tax would be deferred until the death of the surviving spouse and the first deceased spouse’s exemption would be sheltered. Upon the death of the surviving spouse, both exemptions would be utilized.

Under today’s law, that same estate plan could unnecessarily produce a capital gains tax. The assets in the credit shelter trust receive a “step-up” in tax basis to the date of death value of the assets at the date of the first deceased spouse. If the surviving spouse lives another 10, 20 or 30 years, the assets in the credit shelter trust would most likely appreciate but would not receive another step-up in basis upon the death of the surviving spouse. The beneficiaries inheriting the credit shelter trust assets (usually the children) will inherit the assets but their tax basis would be the same as it was when the first spouse died. If the beneficiaries thereafter sell the assets, the capital gains tax would take a big bite out of the inheritance.

For most Americans, it makes more tax sense to cause the assets to be included in the surviving spouse’s estate so that there would be a second step-up in basis upon the surviving spouse’s death. A traditional credit shelter trust and marital trust design (A/B trust) would not accomplish a second step-up in basis.

It is likely that if you haven’t had your estate plan updated within the last couple of years, these tax law changes could greatly impact your plan. As a reminder we offer a complimentary estate plan review every 2 years at which time we can address these changes and determine whether our clients would benefit from updating the tax provisions of their estate plan.

2500 North Military Trail, Suite 312
Boca Raton, Florida   33431
Phone: 561-392-1800

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