For married couples with a taxable estate, attorneys have traditionally recommended A/B planning to help minimize federal estate taxes. A/B planning meant that at the first spouse’s death, the estate was divided into two parts:
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The marital part, which was treated as going to the surviving spouse for estate tax free for federal estate tax purposes, and
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The non-marital part, which was treated as going to the kid’s estate tax free, if properly set up.
With proper A/B planning, both the first spouse to die and the second spouse would have gotten credit for their estate tax exemptions—essentially doubling the amount that passed to the kids free from federal estate taxes.
What changed?
Well, the 2010 Tax Act, passed in December, made any unused federal estate tax exemption at the first spouse’s death portable. The second spouse to die could add the unused exemption to his or her own exemption, making the total that can pass estate tax free as high as $10 million. The portable exemption does not require the kind of special estate planning that the A/B technique needed. These rules are effective for the next two years.
So is A/B planning still needed? The answer is yes when:
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Spouses want to earmark certain assets for children instead of surviving spouse.
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The length of time between spouses’ deaths is likely to be substantial.
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The couple is worried about what changes might occur in 2013.
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Spouse or children need protection against creditors, lawsuits or divorce. With a 50% divorce rate in our country, many families are concerned that their legacy will never make to their grandchildren and will end up in an in-law’s possession.
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Asset protection for the surviving spouse from things like Medicaid spend down
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Losing the couple’s legacy if a surviving spouse remarries and the assets end up passing to the new spouse through divorce or at death.
In light of the changes made by the 2010 Tax Act, I am strongly recommending that those with sophisticated estate plans have those plans reviewed.
As always, we would be happy to review your estate plan. Please call the office at (630) 443-8575 to set up an appointment.