Estate planning in the 1980s and 1990s was complicated for those seeking to protect their wealth from the hefty federal estate tax. The estate tax exemption amount was a mere $161,000 in 1980 and languidly reached $600,000 in 1990. Meanwhile, the federal estate tax rate was a painful 70% in 1980, depressing to a still painful for most at 55% in 1990. The combined low exemption and high tax rate led many couples to implement sub-trust planning in their estate plans. Fortunately for the moderately affluent tax-payers today, the exclusion amount as of 2015 has increased to $5.43 million. In addition, married couples can get the benefit of two individual exemptions, which brings the 2015 total exemption amount to nearly $11 million per couple.
As a result, the federal estate tax is no longer the biggest concern for most moderately well-off Americans who want to avoid taxes on wealth they leave to heirs. According to the Wall Street Journal, only about 3,700 estates –or 0.12% of the total— are expected to owe federal estate tax this year.
So what happens when a spouse passes away with the former sub-trust estate plans from 20+ years ago? The trust administrator endures headaches and could spend a lot of time on unnecessary sub-trust allocations or administration complications.
How can you avoid this? Consider your estate planning goals and the current approximate value of your trust. Couples whose revocable living trusts provide for subtrusts when the first spouse dies should contact their estate planning attorney to determine if that plan is still the best approach. Subtrusts on the death of the first spouse may not be needed (or appropriate) given the higher exclusion rate of $5.34 million per spouse.
However, there are non-tax reasons why subtrusts may still be appropriate, such as enabling the grantor to look after his or her current spouse and to ensure that the assets from the trust are then passed on to beneficiaries of his or her choice, such as the children from the grantor’s first marriage.
The complexities of each individual case vary: to find out the best estate plan for you, discuss your wishes with your attorney.
As always, we encourage you to reach out to Santa Barbara Estate Services if you know of someone who needs a professional to assist in trust administrations.
