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Money March 2013

Legal Ease

Estate Tax Planning: Separate or Joint Trusts?

By Jonathan J. David

Since the value of your estate is well below the federal estate tax exclusion amount, there is no need for you to engage in estate tax planning at this time and the separate estate tax planning trusts you prepared in 2003 are probably no longer necessary.

Dear Jonathan: Back in 2003, my wife and I prepared tax planning trusts, which include both marital and credit trust provisions, to take advantage of the federal estate tax exclusion which at that time was $1,000,000 per person. At that time our combined estate was valued at just over $2,000,000. When Congress increased the exclusion to $5,000,000 per person in 2011, we contemplated updating our estate plan at that time, but decided to wait because we knew the $5,000,000 exclusion was only temporary and would expire at the end of 2012, and we did not want to have to modify our estate plan twice in two years.

Now that the American Taxpayer Relief Act of 2012 has been enacted keeping the federal estate tax exclusion at $5,000,000, it is clear that we no longer need to have tax planning trusts because the value of our estate is now only $1,500,000. Should we simplify our estate plan by replacing our separate trusts with a joint trust or should we keep separate trusts but do away with the tax planning provisions? Do you think the exclusion amount will remain the same for a while, or do you think it will change again in the near future?

 

Jonathan Says: As of right now, the $5,000,000 exclusion (actually it is $5,250,000 in 2013), is considered to be permanent and is not set to expire in two years as was the case the last time around. Consequently, you do not have to worry about the law changing any time soon, although, as you know, there is nothing to prevent Congress from enacting new legislation, which could once again impact the federal estate tax exclusion or any other aspects of the federal estate tax.

Having said that, since the value of your estate is well below the federal estate tax exclusion amount, there is no need for you to engage in estate tax planning at this time and the separate estate tax planning trusts you prepared in 2003 are probably no longer necessary. You might want to consider having a joint trust instead unless there are non-tax related reasons that would call for the existence of separate trusts. Such reasons might include:

  • You are in a second marriage and you (or both of you) want to make sure that certain of your assets go to your children or others and are not controlled by your spouse.
  • You and your spouse have a prenuptial agreement and you want to make sure your estate plan is consistent with the terms of that prenuptial agreement.
  • You have no problem providing for your spouse during your spouse’s lifetime if he or she survives you, but you don’t want your spouse to have the unfettered right to transfer your entire estate to a new spouse or someone else if you were to die first.
  • One of you has certain assets that you want to control in your own trust and do not want put into a joint trust.

If there is no compelling reason for you to maintain separate trusts, then a joint trust might make sense in your case. I encourage you to meet with an estate planning attorney in your area who can review with you both types of trusts and help you determine which type of trust, i.e., separate or joint, is the best fit for you at this time. That attorney can also review with you any other matters you wish to address, such as who you want to name as your fiduciaries in your estate planning documents, whether probate avoidance is of importance to you, and who you want to receive your assets. Based on that information, he or she will be able to make recommendations to you as to how to modify your estate plan in order to meet your objectives. Good luck.

 

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, PC , 1700 East Beltline, N.E., Grand Rapids, Michigan 49525.

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