With estate tax planning, flexibility is important. The estate tax laws are scheduled to sunset next year. But, the results of the presidential and congressional election suggest that the existing estate tax laws will likely be renewed. This should lessen the risk you or your client’s assets will be subject to in estate tax at death.
These are some planning considerations to keep in mind with your or your client’s estate tax planning so that plans can be flexible:
- Simplify your estate plan. If you or your spouse each have separate trusts, you may want to consider combining them into one joint trust. Separate trusts are important for estate tax planning. However, if the estate tax laws remain and the exemption is approximately $14 million per spouse or a $28 million for a married couple, separate trust planning may no longer be beneficial. Instead, combining the separate trusts into one joint trust could simplify your estate plan. If your spouse passes, that same trust will continue for the survivor. It won’t be necessary to re-title assets and file an additional tax return for the deceased spouse’s trust. Also, the current estate tax law allows for a deceased spouse’s unused exemption to be carried over for the benefit of the surviving spouse. If your spouse passes first, you could make this tax election so estate taxes would be avoided or minimized your passing.
- Create flexibility in your estate tax plan. Keeping separate trusts may still be helpful for you or your clients. It’s likely the estate tax exemption remain very high for the next 10 years. But, if the presidency and Congress changes, estate tax laws might be modified. Based on recent Democratic proposals, this could significantly reduce the exemption to $3 million per spouse or $6 million for a married couple. In this tax environment, having separate trusts will help to protect your assets against the estate tax. Separate trusts can be drafted to allow a surviving spouse to decide if that separate trust should be maintained when the first spouse passes, or if it should be combined. In other words, separate trusts can be continued at the first spouse to pass if that is beneficial from an estate tax standpoint. Or, they can be combined into the surviving spouse’s trust if the estate tax is not a concern. This structure provide flexibility to your plan so the trusts can be maintained if the estate tax exemption is significantly reduced or combined into one trust if the estate tax exemption remains very high.
- Incorporate income tax planning into your estate tax plan. Estate tax planning has traditionally been designed to just protect against the estate tax. The downside of this traditional approach is that the assets in the deceased separate spouse’s trust don’t get a second step up in basis. This means that when those assets are sold and distributed to your family or other beneficiaries, there would be a gain equal to any post-death appreciation in those trust assets. In other words, this doesn’t minimize income taxes to your family or other beneficiaries There are ways of drafting separate trusts to avoid this. The separate trusts can be structured to potentially obtain a second step up when both spouses have passed. This can be a significant income tax benefit to the family because it would eliminate or wipe out tax from the post-death appreciation.
If you have any questions about your or your client’s estate tax planning, feel free to contact me at phmulder@cunninghamdalman.com.
