Are you married and the last time you updated your trust was before 2011? If so, your estate plan is probably of the old “AB Trust” variety. Before 2011, that was the only kind of trust that allowed married couples to double their federal estate tax exemption value. After 2011, the legal principle of “portability” came into existence. AB Trusts often are also called “Marital and Family Trusts,” “QTIP,” or “Bypass Trusts.”
What is Portability?
Basically, portability means that whatever amount of an individual’s federal estate tax exemption is not used before they die, their surviving spouse can claim that amount and use it themselves. Portability is now a permanent part of the tax code, but the old kind of AB Trusts may actually hurt you more than help.
For example, Frank and Jane have been married for four decades. If Frank dies this year, this federal estate tax exemption is $5.49 million. If he used none of his exemption, Jane can take Frank’s unused amount and add it to her own, in effect making her exemption total $11.98 million. Upon both Frank’s and Jane’s death, all their property received an adjustment of basis. This means that their descendants’ income tax and capital gains tax liabilities is lowered.
How Old AB Trusts Can Hurt You
Now, let’s say that Frank and Jane had a normal pre-2011 estate plan that they did not update. Not only would June be stuck with an old estate plan, but Frank and Jane’s descendants would not get an adjustment of basis after Jane dies. This ultimately means that their descendants will have a higher tax bill than they could have.
This is just one scenario of old AB Trusts that may require a second look at your estate plan to see if it requires a change. However, there are still good reasons to use AB Trusts in today’s environment. These considerations must be weighed so you can make an informed decisions of what is best for you and your family. Contact The Rains Law Firm or schedule a complimentary initial meeting to discuss what kind of estate plan, including AB Trusts, is right for you.