By William M. Mills, Esq.
Over the last decade, the total value of property that an individual can pass free of federal estate tax at death has more than doubled. The so-called “unified credit” or “applicable exclusion amount” (the “federal exemption”) allows an individual dying in 2016 to pass up to $5,450,000 of assets without incurring federal estate tax (or even having to file a federal estate tax return: Form 706). As recently as 2008, this exemption amount was only $2,000,000. In 2003, the exemption amount was only $1,000,000. Note that the Ohio estate tax has been repealed, effective for decedents dying on and after January 1, 2013.
Traditionally, estate plans have been drafted to take maximum advantage of the federal exemption. Most marital deduction trusts (also called A/B trusts) utilize a formula, by which the B trust (or family or credit shelter trust) is funded with assets up to the federal exemption amount, and the A trust (or marital deduction trust) is funded with the remainder, if any, of the decedent’s assets. In most cases, the A trust makes a generous provision for the surviving spouse, paying to her/him all of the trust income, and perhaps giving her/him the right to withdraw all of the trust principal. The B trust would oftentimes have more restrictive provisions for the surviving spouse, and might even be held solely for a decedent’s children and/or grandchildren. Upon the death of the surviving spouse, the assets of the B trust would not be includible in that spouse’s estate, but would also not receive a step-up in basis for income tax purposes.
Given the dramatically increased federal exemption amount, it is important now to review all formula-driven marital deduction trusts. As an example, under prior law, when the federal exemption amount was only $1,000,000, a marital deduction trust of a decedent with a $3,000,000 estate would be allocated as follows: $1,000,000 into the B trust, and the remaining $2,000,000 into the A trust. However, under the current, greatly expanded federal exemption amount, the trust of a decedent dying with $3,000,000 in total assets would be entirely allocated to the B trust, with no funding for the A trust (the marital deduction trust).
We would strongly recommend that clients with a marital deduction trust revisit their estate plans, to ensure that, under the greatly expanded federal exemption amount, their provisions for their surviving spouse are still adequate and appropriate.
If you would like to discuss these or other questions relating to your estate plan with one of our attorneys, please contact William M. Mills, Edmund G. Kauntz, Jean M. Cullen, or Jay P. AuWerter by telephone at 216-292-5807.