By LISA L. CLARK
For the Auburn Reporter
New estate tax provisions in the law enacted with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 might cause some to feel that estate planning is no longer necessary and is a “thing of the past.”
To the contrary, this false sense of security could result in very unintended results.
Specifically, many wonder if the use of a credit shelter trust has become obsolete with the new law adding “portability” of the lifetime exclusion amount between spouses. What this is referring to has to do with the estate and gift tax exclusion available to each of us during lifetime and at death which was increased to $5 million under this new law.
In the past, if the first spouse to die did not use their exclusion amount, it could be lost, causing the estate of the surviving spouse to have significantly higher exposure to estate taxes. The traditional tool to circumvent this “wasting” of the exemption at the first death has been to fund one or more trusts at the first death as established in the estate planning documents – commonly referred to as a “Credit Shelter Trust” or “Bypass Trust.”
Now, under the new law, any unused portion of the $5 million from the first spouse can pass to the surviving spouse and be added to their $5 million exemption. The “portability” of the exclusion between spouses might seem to replace the need to establish a testamentary trust at death; however, there are several reasons one should still consider the role of a trust in their estate planning.
First off, the new provisions are temporary. The new estate and gift tax provisions enacted December 2010 are set to expire December 2012. At this point, no one knows what will happen after the provisions “sunset,” and planning based on speculation may not be in your best interest.
Second, the portability provision is not automatic and requires an election that could easily be missed by the executor of the estate of the deceased spouse. Additionally, in order to make the election, the filing of a federal estate tax return is required, which may mean unnecessary costs for an estate that is not large enough to normally require a federal estate return.
Third, only the exclusion of the immediately predeceased spouse of the surviving spouse is portable, meaning if the surviving spouse remarries, any unused exemption from the first spouse could still be wasted.
Fourth, many states impose estate tax (like Washington state) at lower levels than the federal levels and do not allow portability. In Washington state, the estate tax exclusion is $2 million per person. State tax that can be avoided through the use of a trust may end up being applicable if relying on portability, wasting all or part of the state tax exclusion at the first death.
Last, remember that trusts have purposes far beyond estate tax savings. Many trusts are set up as a vehicle for providing asset protection to hedge creditor, bankruptcy and divorce risk or “spendthrift” beneficiaries. Trusts can provide for more privacy and control in the disposition of assets which is often a concern when there are children from prior marriages.
On the other hand, portability might be the best solution for your situation and in some cases does make sense. In which case, if you have current language in your estate planning documents that requires the funding of a trust through a formula this could work against you. In either case, ignoring estate planning or feeling it is no longer necessary could be the biggest risk.
Lisa Clark is a shareholder of Fitchitt, Benedict & Clark PS Inc., Auburn. They are a full-service accounting and business consulting firm offering traditional tax and accounting services along with business valuations, estate planning and sales or acquisition of a business.
