AB Trust Creates Tax Liability

The Will or revocable Trust you signed to minimize estate taxes may actually increase the tax burden on your family after your death.

There have been significant changes to the federal estate tax system since 2013, including the doubling of the federal estate tax exemption to $11.18 million as part of the 2017 tax act.  Before 2013, estate planners commonly used a formula to divide assets between a “Family Trust” and a “Marital Trust,” at the death of the first spouse.  This design gave the surviving spouse full use and benefit of all assets, without losing the estate tax exemption available to the deceased spouse.

However, with the changes to the federal estate tax law since 2013, the traditional formula division is no longer recommended, and may actually increase your overall tax liability.  This is because the old formula design prevents your family from receiving a step-up in income tax basis at each spouse’s death.  At some point in time, inherited assets will be sold.  Changing the tax provisions in your Will or Trust will lessen the income tax burden on your family in the future.

If your Will or Trust contains the language below, references a Trust A and Trust B, or a Family Trust and Marital Trust, you probably need to update your estate plan:

     “The Family Trust shall consist of assets with a value equal to the lesser of (i) the federal estate tax applicable exemption amount, or (ii) the state estate tax exemption amount available to my estate at the time of my       death. . .”

     “The Marital Trust shall be funded with that amount of assets necessary to reduce the federal and state estate tax payable at my death to zero. . .”

Having trouble deciphering the legalese of your Will or Trust?  Call the Estate Planning Group at Hinkle Law Firm LLC at 316.631.3131 to help make sense of your estate plan.