Page 32 - December 2018 | Cleveland Metropolitan Bar Journal

BarJournal ESTATE PLANNING

JU LY /A UGUST 20 15
feATUre Whither the A-B Trust?

is There still a use for this estate-Planning Warhorse

in a World of Portability and sky-high Tax exclusions?

BY ROB CHALOuPKA

he past two decades have seen typically used for married couples. When the million WITHOUT using A-B trust planning. As
some incredible shifts in tax policy, first spouse dies, the bypass trust (the “B” trust) a result, many clients may wish to implement this
and in estate planning practice, is funded with an amount equal to the estate-tax simplified approach — this is where clients will
when it comes to planning for exclusion amount to minimize both federal and often discuss using a joint trust, which fits well
T clients to minimize their estate state estate taxes. Any remaining marital assets into the “what’s mine is ours” thinking of many
tax liability. To set the scene, cast your memory would transfer to the surviving spouse outright married couples, even if it’s not always the wisest
back to the halcyon days of 1998 — the year a or be held in a trust for his or her benefit. Assets planning move. However, one advantage of a
little company called Google, Inc. was founded, owned by the deceased spouse get a step-up joint trust is that the entirety of the couple’s assets
Roger Maris’ home run record was broken, and in basis at that spouse’s death. Then, whatever — those left by the deceased AND surviving
Armageddon was #1 at the box office. In that assets end up included in the surviving spouse’s spouses — will receive a step-up in basis at the
year, the federal estate tax exclusion amount was estate get an additional basis adjustment at the surviving spouse’s death.
$625,000 per person, with a maximum tax rate surviving spouse’s death. Although the bypass
of 55% applicable to the estate. In addition, Ohio trust avoids estate taxes, the assets held in this Disclaimer Provisions
charged an estate tax ranging from 2–7% on trust do not receive a basis adjustment when the One option to increase flexibility in is to draft
estates valued at more than $40,000. second spouse dies. But, the future growth of a disclaimer provision for federal tax planning.
Fast forward to 2018, and you’ll see that those assets remains outside the gross estate at When the first spouse dies, the surviving spouse
the federal exclusion amount is now $11.18 the death of the second spouse. receives the trust assets. The surviving spouse
million, with a top rate of 40%. On top of that, Many clients with long-standing estate plans then has a chance to make a disclaimer election,
any unused portion of the exclusion amount is (and significant assets) likely have some form of upon which the disclaimed assets go to the
“portable” to the surviving spouse, meaning a an A-B trust in place. Because of the intense focus bypass trust. This way, the surviving spouse
married couple could potentially shelter nearly on reducing estate-tax liability, these trusts may can use all, or at least a portion of, the deceased
$22.4 million from federal estate tax liability contain inflexible funding formulas that force spouse’s estate tax-applicable exclusion amount.
between them. And, of course, Ohio repealed substantial assets owned by the deceased spouse Further, it may bring clients more peace of mind,
its estate tax completely, effective 2013. 1 into the bypass trust to minimize taxes. But, with since they don’t have to commit to automatically
For decades, one of the key tools in an estate- the federal estate tax exemption amount steadily funding the bypass trust.
planning attorney’s toolkit has been the A-B, increasing — now at $11.2 million — a surviving When examining this option, be sure the
or “bypass” trust. But, with the much smaller spouse could feel “disinherited” and left with less client understands the planning responsibility
number of clients to whom the estate tax will control over the assets at the first spouse’s death. left to the surviving spouse’s discretion:
apply these days, it’s worth asking whether an A surviving spouse, with or without examining • Will the surviving spouse have to examine
estate plan using an A-B trust still relevant? the trust’s provisions with an attorney, might the tax picture and execute a disclaimer to
Furthermore, with the rapid pace of change in decide to scrap this funding plan entirely and minimize taxes?
this area of law within the past few years, is it move toward a more simplified approach. • Does the surviving spouse understand the
worth it for clients to have an attorney review nature of the election?
their existing documents, only to risk a further Portability If not properly educated about the benefits
change in the law a year or two later? The Obama Administration introduced the of this planning option, the surviving spouse
While the landscape has certainly changed a concept of “portability” of the federal exclusion might end up believing that he or she has
lot in recent years, there is still some benefit to amount in 2010. Using portability, the surviving been disinherited.
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traditional A-B trust planning. While this form spouse can inherit not only the assets of the first
of a trust is not as ubiquitous or necessary as it spouse to die, but the surviving spouse also picks State Estate Planning
once was, there are still several opportunities up whatever remains of the first spouse’s $11.18 While Ohio eliminated the estate tax in 2013, some
in an estate planner’s practice to dust off one of million estate-tax exclusion. Generally speaking, clients may have estates subject, at least in part, to
the old, time-tested devices. for federal estate-tax purposes, the first spouse estate taxes in other states. The estate tax still exists
can simply leave all their assets to the surviving in 15 states, as well was the District of Columbia,
How It Works spouse outright, along with any remaining with another 6 states imposing an inheritance tax
The traditional “A-B,” or “bypass,” trust is exclusion amount, and protect up to $22.36 on beneficiaries. It’s important for Ohio attorneys
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