Tax Law Revisions Allow Couples To Say ‘I Love You’ In Estates
Time was, one from Column A and one from Column B and a couple’s estate planning was pretty much a done deal.
Times change.
According to a recent article on the investment website Morningstar.com, changes in tax laws may have rendered an estate planning approach made famous by actor Humphrey Bogart obsolete.
“For decades, lawyers routinely recommended A/B estate plans for married couples,” according to the story by attorney and award-winning journalist Deborah L. Jacobs .
“Many clients dutifully followed their advice, even though these plans can be convoluted. However, A/B plans that were put in place years ago could have negative tax consequences. If you haven’t reviewed your estate plan recently, it might be time.
“A key component of the A/B plan is dividing an estate into two major parts, a classic technique used by Hollywood icon Humphrey Bogart. In his will, signed eight months before he died in 1957, Bogart left all of his personal possessions to his wife, Lauren Bacall, outright. Bogart provided that after gifts to two of his servants were dispensed, half of the rest of his estate would go into a trust to benefit Bacall (Part A). Taxes would come out of the other half of the estate. Whatever remained after taxes were paid would go into a separate trust (Part B) for the couple’s two children, who were young at the time. This is called a bypass, or credit-shelter, trust. Because the funds did not belong to Bacall, they would be sheltered from tax on her estate. Such arrangements were designed to preserve the first spouse’s estate tax exemption, which would be lost if it wasn’t used when that person died.”
However, Jacobs goes on to say that changes in tax law that took effect in 2013 “make another alternative more appealing for couples that are in stable first marriages and trust each other to manage their joint wealth.”
“These couples can leave all their assets to each other directly in ‘I love you’ wills,” the article continues. “Then, the survivor can carry over the spouse’s exemption, a process tax geeks have dubbed ‘portability.’ At 2015 rates, this system enables married couples to transfer $5.43 million apiece, $10.86 million together, tax-free. Just as under the old law, you can leave a citizen spouse or a charity an unlimited amount, without worrying about tax.”
“Many A/B plans are less attractive today than they once were because the federal estate tax exemption is now so large that the credit-shelter trust is not likely to save heirs any estate tax and is potentially going to cost them income tax,” Walter R. Morris, a lawyer with Wyatt Tarrant and Combs in Lexington, Ky., was quoted as saying.
