By Tiffany A. Halimi 

Have you had an estate plan check-up recently?  If you or a client of yours has not had your trust reviewed by an estate planning attorney recently, your trust may be structured in a way that may be more complicated and cost your surviving spouse and your beneficiaries more than what might be necessary.

Current Transfer Tax Exemptions:

In 2016, each individual has a $5.45M exemption from federal transfer tax that they can apply to transfers of assets made during life or upon death.  Any transfer made in excess of the exemption will result in a 40% transfer tax (also known as an “estate tax” for transfers at death or “gift tax” for transfers during life).  A married couple can apply both spouses’ $5.45M exemption towards their joint estate, for a total exemption amount of $10.9M.

As of this year, an individual can transfer up to $14,000 to any number of recipients without using any of their gift or estate transfer tax exemption.  However, any transfers in a calendar year that exceed $14,000 to the same individual will result in the using of a person’s lifetime transfer tax exemption.

Prior to 2010, an individual’s exemption was personal to that individual  — either they would use it during life or use it at their death.  Either way, their exemption could not be transferred to any other individual’s use, not even their spouse.

Because an individual’s exemption needed to be used upon their death, at the very latest, in order for a married couple to take advantage of using their joint exemption amount, they would need to establish a trust with subtrusts.  The subtrusts may have required a separate tax identification number for each subtrust, a separate tax return filed annually and care by the surviving spouse  not comingle assets between the subtrusts.

Portability is Changing the Way Individuals Can Take Advantage of Their Spouse’s Unused Exemptions.

A concept called “portability” was adopted effective January 1, 2010 and made permanent by the 2012 American Taxpayer Relief Act.  With portability,  the surviving spouse can use the deceased spouse’s unused exemption against the surviving spouse’s future gift or estate taxes.  This allows trusts to be more simply constructed, as the surviving spouse can utilize the entire unused exemption amount of the deceased spouse without necessarily creating a subtrust (often called a Bypass Trust, Credit Shelter Trust or Exemption Trust).

Today, spouses can enjoy the simplicity and flexibility of just one trust while still taking advantage of their joint transfer tax exemption through the use of portability.

This structure has advantages and disadvantages that should be discussed in detail with your estate planning attorney to determine if it is compatible for your situation.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other trust and estate issue.  If you wish to consult with the author of this post, please contact Tiffany Halimi by email at thalimi@clarktrev.com or telephonically by calling her at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this article is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.ClarkTrev.com

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