Under recent laws passed by Congress – effective 2011 and made permanent in 2013 – spouses now have “portability” of their federal estate tax exemption. This means that the unused portion of one spouse’s exemption can be transferred to the surviving spouse upon their passing. Now, the specialized trusts long used by spouses to avoid estate tax, A/B trusts, bypass trusts, and the like are no longer needed in many instances. Before Congress allowed portability of the exemption, spouses would often create A/B trusts to minimize or avoid the amount of federal estate taxes owing on their estate at the death of their spouse.
An Example of A/B Trusts in the Past
John and Yvonne own an estate worth $4 million. They both leave all their assets to each other upon death. When John dies first in 2006, the estate tax exemption is $2 million. However, he does not owe any estate tax because of the marital exemption. Yvonne inherits all of John’s estate and now owns an individual estate worth $4 million. When Yvonne dies in 2008, the estate tax exemption is still $2 million so her beneficiaries must pay estate taxes on $2 million of her $4 million estate.
However, if John and Yvonne had created an A/B trust, John’s assets ($2 million) would have gone into an irrevocable trust at the time of his death and Yvonne would only have an estate worth $2 million at the time of her death. Her estate and beneficiaries would not owe any federal estate tax since all of her estate value would be exempt.
Now There is a Better, Simpler Way
Since Congress has allowed spouses to “port over” their unused exemption to their surviving spouse, creating an A/B trust has become largely unnecessary. As in the example above, if there was portability, Yvonne would just combine her individual exemption ($2 million) with John’s unused exemption ($2 million) by filing the Form 706 to completely avoid estate taxes altogether without the hassle of creating and managing an A/B trust.
Furthermore, Congress has steadily increased the federal estate tax exemption rate over the years. Circa 2015, an individual has an exemption of $5,430,000. This decreases the likelihood that a surviving spouse will ever need to use an A/B trust to avoid tax consequences, even in cases where portability was not an option, since most estates will not be worth more than is exempt.
If you have further questions on how portability might impact your estate plan, contact Hannah Sargent, Alameda County probate and estate planning attorney of Randick O’Dea Tooliatos Vermont & Sargent. Our firm has earned a strong reputation in the Bay Area as a professional team that is dedicated to our clients and fully knowledgeable in all legal and litigation matters that might be troubling them. Call (510) 344-2599 for your free consultation.