Let’s talk about federal estate taxes. Back in the old days the first spouse to die had to use the lifetime estate tax exemption at death or lose it. In the discussion that follows assume a $1,000,000 exemption where the husband dies first.
If the husband left everything to the wife protected by the unlimited marital deduction his exemption went to waste and at her death she could only protect the first $1,000,000 of all she owned including what had been left to her previously. To avoid this the husband created a Credit Shelter Trust, or “B” trust, either during life or at death and funded it with assets equaling the exemption amount. He could give his wife a life interest in the trust, but it would not be included in either estate. So when she used her exemption at death a full $2,000,000 had been protected from federal taxation.
Enter the American Tax Payer Relief Act of 2012 (ATRA) which made permanent the concept of portability. Now any portion of the exemption not used by the husband at death (referred to as the deceased spouse’s unused exemption or DSUE) may be available to the surviving spouse.
This change in the law has led many wealthy clients to believe that there is no need to do any B Trust-type planning.
In fact, there may be several reasons to keep the Credit Shelter Trust in the plans. Consider these 5 Reasons To Keep “B” Trusts In Your Client’s Plans:
Protecting appreciation from taxation
The B Trust removes the growth of the exemption amount from the taxable estate as well. Keep in mind that the DSUE amount is locked in at the first death. It does not increase with inflation like the exemption for the surviving spouse.
More protection from heirs
A B Trust created during life can lock in the intentions of the grantor without subjecting it to future changes in the last will and testament or to contests in probate court.
Assets in a lifetime B Trust are not subject to claims against the grantor or his subsequent estate.
Protection against unintended loss of the exemption
To preserve the DSUE a timely estate tax return must be filed at the first death, even if no estate tax is due. Establishment of a B Trust assures this oversight does not occur.
Untaxed life insurance leveraging
If all or part of the exemption amount is to be used for life insurance to help fund anticipated tax liability it is more productive to buy and keep the insurance outside the taxable estate. The B Trust is a good vehicle to serve as owner of the coverage.
If you have wealthy client couples who want to discuss the merits of B Trust planning versus relying on portability, give us a call and we can alert them to the issues that they should consider and that will arise when they eventually talk to their tax and legal advisors.