Estate & Tax Planning

How can you take advantage of recent estate tax law to ease stress after the death of your spouse?
We don’t like to talk about the future death of our spouse. We know it will be a very sad time in our lives. Until recently this severe grief was compounded by the stress involved with administering our deceased spouse’s trust, paying debts, addressing taxes and establishing family trusts, which sheltered money from lower estate tax thresholds with higher tax rates. Those family trusts doubled the amount a married couple could maintain tax-free, but required year-to-year administration and reviews with estate planning attorneys and accountants to address tax issues. Then Congress passed the American Taxpayers Relief Act of 2012 (ATRA 2012) on January 1, 2013.

Since that date, many clients with trusts have simplified their estate plans and decreased future stress by taking advantage of the “permanent” establishment of the estate and gift tax exemption of $5.25 million per person with a yearly cost of living adjustment (setting the current 2014 exemption at $5.34 million).1 ATRA 2012 also includes a “portability” provision, allowing the surviving spouse to use the unused portion of the deceased spouse’s estate tax exemption. For example, under the 2014 estate tax exemption, if the first spouse to pass away uses $2 million of his/her $5.34 million exemption, leaving $3.34 million of the exemption unused, upon death, the surviving spouse could add that $3.34 million to his/her exemption (for a total of $8.68 million, using 2014 numbers). The net result of ATRA 2012 is that over 99% of Americans will not be charged taxes on their estates or gifts.

With the higher estate tax exemptions comes the opportunity to simplify your estate plan and eliminate the additional stress of trust administration during the same time you are mourning the death of your spouse. Under ATRA 2012, your future estate administration may be less stressful in 2 different ways:

  • First, if you are married and you and your spouse have two trusts (proper planning for the prior lower tax exemptions), you now have the opportunity to unify your estate plans into one joint trust. After one spouse passes away, the surviving spouse isn’t faced with administering two trusts (involving payment of creditors, taxes, further financial management, etc.) Instead the surviving spouse continues under the same joint trust, without having to pay additional taxes, accountant fees or legal fees in the year-to-year maintenance of the deceased spouse’s trust.
  • Second, in the alternative, you may eliminate unnecessary and, potentially, costly terms in your current trust plan. The two trust estates created under the lower estate tax regime often contain terms which establish new trusts at death (the aforementioned “family trust” or “credit shelter trust”) and make it more difficult for a surviving spouse to obtain money from the trust of the deceased spouse. Now, these trusts limiting a surviving spouse’s access to money may be unnecessary. As a result, if you eliminate the “family trust” or “credit shelter trust,” you can make sure your surviving spouse will have immediate, unhindered access to your trust funds.

If you are like a majority of married Americans, you can succeed in limiting unnecessary stress and costs in administering your spouse’s estate by taking action to unify your estate into a joint trust or eliminate provisions for your restricting, subsequent credit shelter trust. To learn more about how you can do so, contact David Mammel at (248) 644-6326.

1. ATRA 2012 states the estate tax exemption of $5.25 million with the yearly cost of living adjustment is “permanent.” However, shortly after signing ATRA 2012 into law, President Obama issued his 2013 Green Book, and requested the estate tax exemption be decreased to $3.5 million. Congress did not respond to this request. Recently, President Obama made this request part of his 2015 budget proposal. At this time, President Obama’s call for a lower, $3.5 million estate tax exemption has not made it beyond his wish list. However, even if the estate tax exemption were lowered to $3.5 million, this would still provide a married couple with a $7 million combined estate tax exemption, which would exempt an overwhelming majority of the population from paying estate taxes.

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