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A New Era of Estate Planning

ThinkAdvisor’s article, “New Estate Planning Strategies for a Post-Portability World,” says that there may be many folks who’ve continued to rely upon their outdated, pre-2013 estate plans. This could easily lead to adverse tax consequences in the future.

Reviewing a pre-2013 estate plan may be really beneficial for higher-income individuals. There are new techniques and strategies to help them take advantage of the new rules to minimize estate and income tax liability.

Relying on the old credit shelter trust strategy may no longer be a wise move, since there are new strategies that can produce dramatic tax savings—as well as more flexibility.

Prior to portability, which allows a surviving spouse to (almost) automatically use the deceased spouse’s estate tax exemption, credit shelter trusts were used by married couples to fully use their two estate tax exemptions. Part of the deceased spouse’s assets equal to the estate tax exemption amount would be placed into a trust created for the benefit of the surviving spouse. The remaining assets—those in excess of the deceased spouse’s exemption—would pass outright to the surviving spouse. The surviving spouse didn’t technically own the assets held in the trust. As a result, those assets would pass without estate tax to his or her heirs. The assets that the surviving spouse owned outside of the trust would also pass without estate tax up to the value of—but not exceeding—the exemption amount.

For many, a credit shelter trust isn’t necessary for estate tax purposes. The “permanently” higher federal estate tax exemption is now at $5.45 million this year. Many folks don’t understand that the value of the assets (tax basis) is in effect frozen at the time they’re placed in the credit shelter trust. Thus, if those assets appreciate in value, they may create an unexpected income tax hit for the heirs. But if those assets were left outright to the surviving spouse, they’d see a step-up in basis upon the surviving spouse’s death. If the asset value has appreciated, capital gains taxes are minimized.

But unlike a credit shelter trust strategy, a disclaimer strategy can provide flexibility to a surviving spouse. This lets a spouse evaluate his or her financial circumstances and the tax rules as they actually exist at the time of the deceased spouse’s death. To use this strategy, he or she leaves all assets to the surviving spouse outright but gives the survivor the option of disclaiming those assets. If the spouse opts to disclaim the assets, they’ll pass into a bypass trust established for his or her benefit. This can be nice if the surviving spouse lives in a state with its own estate or inheritance tax, since that exemption may be a lot lower than the federal exemption. In addition, a bypass trust can also be good from an asset protection standpoint if the surviving spouse is worried about creditors’ claims or a possible new spouse later in life. The disclaimer strategy lets the surviving spouse analyze his or her situation when it’s relevant. They don’t have to rely on a strategy that was possibly put into place years before.

Regardless, consult a qualified estate planning attorney to help you select the most appropriate strategy for your circumstances.

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