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A Better Partnership

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Sep 2013
01
September 01, 2013

Estate Planning Tip: Are two trusts still necessary for married couples?


A-B trust plans have been a staple of estate planning for married couples for years.  With this type of plan, each spouse has a separate trust that provides for a “family” trust equal to the estate tax exemption equivalent and any amounts over that would either be distributed outright to the surviving spouse or held in a “marital” trust.  Because of changes to the estate tax, these plans may be outdated for many married couples.  The recent tax law changes not only increased the estate tax exemption to $5.25 million per person, they made permanent the concept of “portability” of the estate tax exemption.  With portability, a surviving spouse can claim the unused estate tax exemption of the first spouse to die by filing an estate tax return upon the death of the first spouse to die.  This allows married couples to completely escape estate taxation on estates of up to $10.5 million without having to use separate trusts.   Therefore, old A-B plans may create unnecessary irrevocable trusts upon the death of the first spouse that will come with administration costs, or perhaps court costs if the surviving spouse has to go to court to terminate the trust.  As a result, many lawyers are counseling clients to simplify by moving to joint trusts, or no trusts at all. 

However, there can still many valid reasons for keeping the two trust plan in place.  Some states have their own estate tax, separate from the federal estate tax.  Michigan is not one of these but if you own property in other states it should be considered.  Another reason has to do for planning for grandchildren.  Portability does not apply to the generation skipping tax.  Therefore, if the client wishes to make transfers to grandchildren, or transfers in trust to children with the possibility of later inheritance by grandchildren, it is probably still wise to have separate trusts for each spouse and carefully allocate assets between the two trusts.  Finally, there can be Medicaid planning reasons for having separate trusts.  Separate trusts can allow one spouse to shelter more assets in trust for the surviving spouse or bypass the surviving spouse completely and pass them on to children without divestment penalties. 

Suffice it to say that the new landscape probably necessitates a review for most clients.  If a couple is substantially under the $5.25 million threshold, they probably no longer need the two trust plan (unless they are far enough under that Medicaid planning is warranted) while those over twice the exempt amount probably still need the separate trusts.  Those in the middle need to carefully consider their options with their estate planning counsel.  

 

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