ESTATE PLANNING, PROBATE & ELDER LAW NEWS
If you really want your kids to learn to be financially responsible adults, it's time to stop giving them money.
An effective estate plan should be flexible enough to accommodate changes in circumstances -- maybe not every change, but many of them. For instance, instead of specifically referencing the estate tax exemption amount when drafted, most well-drafted documents contain a formula based on the exemption amount in effect when the decedent dies. But does your estate plan account for the possibility that there will be NO federal estate tax when you die?
A lot of married couples have what's known as an A-B plan. If one spouse dies, two trusts are created for the survivor:
(A) Family Trust: usually containing an amount equal to the federal estate tax exemption amount at the death of the first to die
(B) Marital Trust: containing everything else owned by the first to die
The goal is no federal estate tax at the death of the first to die. The Family Trust is by definition exempt from federal estate tax, and the Marital Trust qualifies for the marital deduction (so is not subject to federal estate tax). The surviving spouse is the only beneficiary of the Marital Trust; the Family Trust's beneficiaries might be just the surviving spouse, the surviving spouse and kids of first to die, or just the kids of the first to die.
But what happens if there's no estate tax whatsoever? If the above language is used, the Family Trust isn't created (no exemption = no federal estate tax = no Family Trust). So there's just a Marital Trust.
Alternatively, you could draft a trust whereby the Marital Trust contains the "smallest amount that will result in no federal estate tax," and the Family Trust contains everything else. Under that scenario, no Marital Trust is created (the "smallest amount" would be $0). So there's just a Family Trust.
So what's the problem? There may not be one, if we're talking about a traditional nuclear family where the spouse is also the sole beneficiary of the Family Trust. But what if both spouses have children from a prior marriage? In that case, we may have a Family Trust of which the surviving spouse isn't the sole beneficiary (or not a beneficiary at all). And we run the risk, under the above scenarios, of either shortchanging the surviving spouse (no Marital Trust created) or shortchanging the kids (no Family Trust created).
Up through 2009 (and starting again in 2011, assuming the law isn't changed), there was a federal estate tax. That was and will be the bad part, at least for people who owed or will owe tax.
The good part was that, in exchange for potentially being subject to the estate tax, you got a "step-up" in basis. Essentially, when an individual died, his or her assets took as their basis for capital gains purposes their fair market value as of the date of death. So, to consider an example,...
Mom buys a bunch of stock in Company X, starting in 1950 and continuing to her death. The actual cost basis for her purchases was $15,000.
Mom dies, and her Company X stock is work $500,000.
Mom's three kids are left the Company X stock under Mom's Will.
What is the basis in the Company X stock? During a year in which there's an estate tax, that's easy: it's $500,000. So, if the kids sell the stock after Mom's death, they pay capital gains on the difference between the sale price and $500,000.
But how is this handled in 2010? There are three main rules:
1. Instead of a step-up in basis, we have a carryover basis regime. So the basis in Company X would be $15,000. But...
2. There is still a step-up in basis for $1.3 million of assets passing to beneficiaries who aren't the decedent's spouse. And...
3. There is a step-up in basis for $3 million of assets passing to the decedent's spouse.
The major problem with a carryover basis regime is that, in many cases, it is difficult or impossible to calculate the decedent's basis in his or her property. (From what I have read, this was the problem when carryover basis was briefly made the law, back in 1976.) And I worry that the biggest result of this change in the law will be full employment for America's forensic accountants.
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