Archive for the ‘Portability: Time to review your Living Trust?’ Category

postheadericon Portability: Do you need to review your Living Trust

Has the portability of the unified credit made your A-B trust unnecessary and a potential liability to your loved ones?

Please note this article is only addressing estates under $10 million. Also note there are other good reasons to still have an A-B trust. Your situation should be reviewed by competent legal counsel prior to any action on your part.

One reason the A-B trust was developed was to allow married couples to double-dip into the unified credit and reduce the amount of estate tax.

In the 1980’s and 1990’s with the unified credit at $600,000, a married couple could shelter $1.2 million with an A-B trust, instead of $600,000 with a simple trust. Said another way, if you had a simple trust you could leave $600,000 to your children before the estate tax would kick in, but if you had an A-B trust, you could leave $1.2 million to your children before the estate tax would kick in. The estate tax was about 50%.

With an A-B trust, on the first death the trust would be split into two trusts, the A trust typically retained by the survivor, and the B (or Bypass) trust is funded with assets to qualify for up to $600,000 of credit on behalf of the decedent.

Then on the second death, the second decedent would be entitled to up to $600,000 credit on the assets in the A trust. So with an A-B trust, the couple could shelter $1.2 million from the estate tax.

Of course if between the deaths the assets in the Bypass trust appreciated, that appreciation would be subject to capital gains taxes on future sale of the asset by the beneficiaries. Because the capital gain tax has been substantially lower than the estate tax, use of the Bypass trust made good tax sense at the time.

With the Bush Tax Act of 2001, the unified credit was scheduled to dramatically increase over a ten year period and then return to $1 million in 2011 unless congress acted.

The Obama Tax Act was signed into law on December 17, 2010. It set the unified credit at $5 million through the end of 2012. But the Act also made obsolete the use of the

A-B trust for estates less than $10 million simply to double-dip into the unified credit, because the Act now created the ability of the surviving spouse to claim decedent’s credit amount without the need for the A-B trust.

A new tax form is to be created by the IRS so that the surviving spouse may file for the decedent’s credit to be added to the credit of the surviving spouse (thus the new term, portability).

So a simple trust and surviving spouse’s election will now shelter the same $10 million that an A-B trust would shelter.

A simple trust would also now save the surviving spouse the cost of administering the Bypass trust during the rest of his or her life. This would include the cost of an annual tax return and the cost of an annual accounting.

And a simple trust would also now save the capital gains on appreciation of assets between the deaths that would otherwise be charged to the beneficiaries.

Has portability made your A-B trust unnecessary and a potential liability to your loved ones?

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