Do you still need a trust?

The portable $5 million gift and estate tax exclusion and the broken suitcase

Remember when the Bush era tax cuts were extended (temporarily) in December 2010? Part of that deal involved raising the amount that could be excluded from federal gift and estate taxes to $5 million per person. A new feature made the exclusion "portable" between spouses so that, for example, a couple could pass along $10 million, free of federal estate taxes, to their children.

Before portability, the same couple with $10 million would probably have received estate planning advice to title their assets evenly between spouses and use credit shelter trusts to take full advantage of the exclusion amount (which varied over the years) and minimize death taxes (which were 45 percent and are now reduced to 35 percent, but only until Dec. 31, 2012). Following the advent of portability, some commentators suggested that estate planning with trusts would no longer be necessary.

Portability is a nice feature, but before you disregard an existing trust or skip trust planning altogether, consider how you will "carry" your portable $5 million death tax exclusion. If the $5 million exclusion were cash, would you carry it in a broken suitcase? Consider what may be "broken" without a trust:

  • The December 2010 tax act and portability expire Dec. 31, 2012; will portability be extended?
  • If you and your spouse were to die unexpectedly without a trust in place, would your children be able to handle an inheritance of $1 million, $5 million or $10 million without any guidance? A trust could provide instructions for distributions of specific amounts at specific ages.
  • If you or your spouse own an interest in a small business, would you or the other owners want that interest publicly appraised by someone appointed by the probate court? That process is eliminated if the business interest is owned by a trust.

Then there is the R word: Remarriage. If the surviving spouse remarries, what guarantees are there, without a trust, that the children from the first marriage will be treated fairly? In addition, upon remarriage, portability with respect to the unused exclusion of the deceased spouse could be affected.

If portability survives beyond Dec. 31, 2012, it will save some estates from paying unnecessary estate taxes when the second spouse dies. But it won't protect against unplanned outcomes that could be avoided with appropriate trust and estate planning. If you have a question about an existing trust or are trying to decide what estate planning is for you, please contact an estate planning attorney at Nicola, Gudbranson & Cooper.

—Tim Clements
tclements@nicola.com