Estate Planning Client Alert
By Richard H. Harris, III, Michael A. Sweeney, Marc S. Stein & Julie E. Firestone on April 26, 2017
There have been a number of changes made in federal estate tax laws over the last couple of years which have been favorable to the taxpayer. As a result of these changes, many taxpayers may not need the traditional marital A-B trust plan, which was a plan commonly used by estate planning practitioners to maximize the use of each spouse’s estate tax exemption. This Notice will summarize the more recent changes that have occurred that could impact your current estate plan if it has not been recently reviewed.
The more significant changes occurred in 2011 when the federal estate tax exemption increased from $3.5 million to $5.0 million with the exemption indexed for inflation. In addition, the concept of portability of the estate tax exemption between married couples was introduced. For the year 2017, the federal estate tax exemption is now $5.49 million. In simplified terms, portability allows the amount of federal estate tax exemption that is not used in the first spouse’s estate to be transferred to the surviving spouse’s exemption, such that the surviving spouse’s estate can use the deceased spouse’s unused exemption plus his or her own exemption when the second spouse dies. An example will help illustrate this concept. Assume husband and wife are married and all of their assets are titled jointly with rights of survivorship and their combined estate is $8.0 million dollars. Because of the unlimited marital deduction for transfers between spouses, at husband’s death his estate will owe no federal estate tax and no portion of his federal estate tax exemption needs to be used. If husband’s estate timely files a federal estate tax return and makes the appropriate election on the return, wife’s estate will be able to use husband’s unused exemption of $5.49 million plus the amount of wife’s estate tax exemption, which, if both deaths occurred in 2017, would allow up to $10,980,000 to be transferred to their children without incurring federal estate tax. If, however, husband’s estate did not file a federal estate tax return in 2017 and did not, therefore, make the portability election, when the surviving spouse subsequently dies, her estate will incur federal estate tax because she will only be able to use her estate tax exemption ($5.49 million if she died in 2017) to shield her estate from federal estate tax. If her estate is $8.0 million, her estate would pay estate tax of 40% on the amount in excess of her estate tax exemption. It should be noted that portability does not always work. For instance, if after the first spouse’s death, the surviving spouse should remarry, and her new husband predeceases her, when the surviving spouse subsequently dies her estate will only be able to use the unused exemption of her last deceased spouse. Overall, portability is a useful planning device and married couples now have the opportunity to pass $10.98 million to their children without using a marital A-B trust plan so long as the various requirements are met.
Changes in the Ohio Estate Tax:
House Bill 153 repealed the Ohio estate tax. As a result, which was effective January 1, 2013, there is no Ohio estate tax for residents who died on or after January 1, 2013. Thus, Ohio is now competitive with many other states that no longer have a state estate tax.
Previous A/B Trust Estate Plans:
Before the increase in the federal estate tax exemption rates and the repeal of the Ohio estate tax, the commonly executed estate plan for married couples was a marital A/B trust format. These marital A/B trust estate plans were used to utilize each spouse’s estate tax exemption by carving out a family trust (Trust B) at the first spouse’s death which would not be included in the surviving spouse’s estate at her subsequent death. For those married couples whose combined estates are less than the current federal estate tax exemption of 5.49 million, the focus is no longer on reducing estate tax but is, instead, on obtaining a step up in income tax basis in one’s assets at the first spouse’s death as well as at the second spouse’s death. In light of these recent tax law changes, married couples who have not had their estate plan recently reviewed should now have it looked at, particularly if the plan uses a marital A-B trust arrangement. Please contact a member of Brouse McDowell’s Estate, Succession Planning, and Estate Administration practice group for more information and a review of your current plan.