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Arcadia Weekly Sep 09, 2015
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By James R. Helms, Jr.
These are exciting times for people who are concerned about the taxes that their children will have to pay upon their deaths. Congress has been busy; and, to the amazement of experts who follow these things, the results have been very favorable to us as taxpayers.
The new rules affect every estate plan. All taxpayers should be aware of these new rules. For the past 30 or so years attorneys have used a trust form which is sometimes called an A/B trust. There are thousands of these trusts in the hands of clients. Most of them no longer make sense. The A/B trust was designed to save estate taxes (death taxes). In former years the estate tax exemption was $600,000. Now the exemption is $5,430,000 per person. The A/B trust is no longer needed to save estate taxes for the majority of taxpayers.
The A/B trust form was designed to save death taxes at the expense of income taxes. Now, with the new tax laws that came into effect with the American Taxpayer Relief Act of 2012, the emphasis shifts to saving income taxes. This change in the tax law also makes it easier for the attorney to draft a trust that fits the family needs, rather than a plan to fit the estate tax rules.
In the typical A/B trust format the B trust becomes irrevocable on the death of the first spouse to die. This means that the income tax “basis” for the properties allocated to the B Trust will not get a second “step up” on the death of the second spouse. This could mean a significant increase in capital gains tax to the children who inherit those assets. We all know that property values in Arcadia and the San Gabriel Valley have increased dramatically in recent years. This increase carries with it potential increases in the capital gains tax on sale. The estate tax law allows a parent to take this gain to heaven with them.
The archetypical trust that leaves the entire estate to the surviving spouse can pass up to $10,860,000 tax-free to the children without out any adverse tax effects. This is the best of all worlds for many families. It eliminates capital gains taxes on the family assets at the death of the surviving spouse, simplifies the administration of the trust, and the life of the surviving spouse.
Like all good things, there are some aspects of the A/B trust that may still appeal to families with children of former marriages, as well as those who have creditor problems. These are aspects of estate planning that should be discussed with the estate planning lawyer.
If your estate plan no longer makes sense you should contact your estate planning attorney to explain the new tax law and how it affects your particular needs.
James R. Helms, Jr. is a Certified Specialist in Estate Planning, Probate, and Trust Law with Helms & Myers. 150 N Santa Anita Ave., Suite 685 Arcadia, CA 91006. Telephone: (626) 445-1177.
