For most people with an estate plan, the revocable trust is the foundation of that plan. It serves as the road map that coordinates all the other moving pieces of your estate. Given recent changes to the federal estate tax system, a married couple who had their plan drafted before the new tax cuts and jobs act was enacted may see an increase in the taxes paid at death instead of savings on taxes, as a result of the significant changes in the law.
In years past, traditional estate plans directed that two trusts be established at the death of the first spouse. One trust contains the surviving spouse’s interests in assets and the other contains the deceased spouse’s assets. This was a great structure to have in place for avoiding or minimizing any estate tax. However, under the recent enacted tax cuts and jobs act, the federal estate and gift tax exemption is almost 11.2 million dollars per individual. As a result, most couples will not have taxable estates and will not owe federal estate tax at death. Therefore, it may be time for a review of your current revocable trust to ensure that your plan is maximized for tax benefits in other areas, most notably income tax in California real property tax. It is possible that an alternative structure for your estate plan would provide greater benefit to you in the areas of income tax and property tax and allow for more flexibility after the first spouses death.
For estates that are not likely to incur estate tax, it is often preferable to create an estate plan that
will minimize capital gains tax if the beneficiaries sell an appreciated asset. Eliminating the four split under this AB trust funding furthers this goal by allowing trust assets to receive one third to receive a stepped up basis at both the first death and second death of a married couple. Additionally, ongoing income from an income producing asset will not have been taxed inside the bypass trust at the compressed trust income brackets. This means the trust income is taxed at a much higher rate than the same income would be taxed to an individual.
Another key issue that is often not considered when considering estate planning under the new tax cuts and jobs act is that all of the estate tax and gift tax exemption is only in place until 2026 and the estate tax exemption will return to its 2017 level, unless congress steps in. As such, a good estate plan must take into consideration the possibility that this reversion back to prior estate tax levels and provide flexibility for postmortem tax allocation of assets. One option is to give the surviving spouse a disclaimer power over assets to fund a bypass trust for the benefit of the surviving spouse during his or her lifetime, and then to the husband’s and wife’s children.
Under the old AB trust structure, the bypass trust was funded with the decedent’s assets, so that they were at a level in which no estate tax would be due. This structure is great for avoiding estate tax at the death of the first spouse. However, a Bypass Trust is at any assets that sold between the first spouses death and the surviving spouses death are subject to capital gains tax when those assets are sold.
Another tax that affects many of our clients in Silicon Valley that is not adequately considered when a married couple creates their estate plan is California real property tax. The value of real property in Silicon Valley continues to climb and with it the importance of avoiding property reassessment upon your death becomes more and more important. Property tax laws relating to real property held in the trust are complicated and evolving. If not carefully structures, your estate plan may inadvertently trigger a property tax reassessment, which may be devastating to your beneficiaries. We strongly recommend that you review your estate plan structure with an experienced estate planning attorney to ensure that your assets will be transferred to your beneficiaries in the most tax efficient way possible.