New Estate Tax Law: Whither Goest The Trust? By J. Grant Coleman

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Background

Prior to the enactment of the changes to the federal estate tax laws made late in 2010, classic estate tax planning, even for couples of relatively modest wealth, was the so-called “A/B Trust” model. Under this approach, the amount that could be passed tax free on the death of the predeceasing spouse (“exempt amount” which ranged from $1,000,000 to $3,500,000, depending on the year of death) was allocated to a trust (“exempt trust”) which provided for discretionary distributions of income and principal to the surviving spouse and children. Any amount in excess of the exempt amount was allocated to another trust (“marital trust”) which provided for mandatory distributions of income to the surviving spouse and was not taxed in the predeceasing spouse’s estate. The assets in the exempt trust were not included in the taxable estate on the death of the surviving spouse but the marital trust was part of the surviving spouse’s taxable estate. In this manner, the maximum amount could be passed estate tax free to the children and any estate tax was deferred until the death of the surviving spouse.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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