By David E. Inabinett
On January 1, 2013, Congress and President Obama passed the American Taxpayer Relief Act which, among other things, increased the individual estate tax exemption to $5.25 million per person ($10.5 million per married couple), and provided portability such that it no longer matters how assets are titled between spouses in order to claim the full $10.5 million exemption amount. So if your estate does not exceed $10.5 million and you are married, why not have what everyone wants, a “simple will,” leaving everything to your spouse, then to your children – quick, cheap, easy, end of story?
Well, such a basic estate plan could work to accomplish your goals, so long as several key items line up. First, the surviving spouse may claim the full $10.5 million exemption so long as a Form 706 federal estate tax return is filed upon the first spouse’s death. Without that key filing requirement made within 9 months of that first spouse’s death, the deceased spouse’s $5.25 million exemption is lost. Next, even if the Form 706 is timely filed, portability is preserved only so long as that surviving spouse does not remarry. Upon remarriage, portability of the entire $10.5 million exemption is also lost. Finally, though not likely, it is possible Congress could lower the estate tax thresholds in the future or even repeal portability. This would make the inclusion of a trust – at least one which could be funded upon the surviving spouse’s “disclaimer” or giving up of the deceased spouse’s estate within 9 months of his/ her date of death – critical to adjust a potentially taxable estate left for that surviving spouse.
So, are there other considerations aside from estate taxes that affect ones decision to use a trust for estate planning purposes? Under a simple will leaving all assets outright to a surviving spouse, should that surviving spouse re-marry and not enter into a pre-nuptial agreement, certain rights of the second spouse would attach and entitle that second or successive spouse to a portion of your estate. Additionally, a surviving spouse who inherits the entire combined estate has every right to change his/her mind and leave the combined estate to whomever he/ she wishes upon their later death, even if that includes individuals or charities not contemplated by the deceased spouse’s plan. It would not be outside the realm of possibility that children of the first marriage could be disinherited or charities which were important to the couple while married are left out following the first spouse’s death. A surviving spouse may not be as savvy handling money and could potentially squander what was left outright to him/her leaving insufficient funds to provide for their care. Lastly, any assets left outright to a surviving spouse would be subject to complete spend down before Medicaid might be an option to pay for long-term nursing care, whereas monies left in trust for a surviving spouse would typically not be subject to required spend down before Medicaid eligibility was an option.
Remarriage, incapacity, nursing home needs, and possible loss of estate tax portability…Hmm, maybe a trust ain’t such a bad idea after all!