Although the recently passed tax bill clarifying the estate tax situation was good news for affluent Americans, some provisions in the bill have also created a sense of urgency for the advisors of affluent clients to review existing estate plans to ensure these do not contain provisions that could, ironically, increase their tax liability.
In a video presentation, Robert Klueger, a California certified tax law specialist with the firm Klueger & Stein LLP in Los Angeles, reviews three changes from the tax bill. The first two have been well documented: an increase in the exclusion from estate taxes to $5 million for an individual and $10 million for a married couple; and for those portions of an estate subject to the federal “death tax,” a reduction in the tax rate to 35% for the increment over $5 million.
Klueger devotes the bulk of his comments on the video to the third change, which he argues should prompt a review of existing estate planning for wealthy clients. This is the portability of the estate tax exclusion, which allows a spouse who does not use the $5 million exclusion before his or her death to pass it on to the surviving spouse who can then shield $10 million from estate taxes under the unlimited marital deduction.
Klueger explains that before passage of the 2010 tax bill, it was necessary to use an estate planning strategy called an AB trust to double up on the exclusion from estate taxes. Now, thanks to the portability feature, an AB trust is no longer necessary. However, that leaves those with such a trust with a feature that could do more harm than good.
With an AB trust, the assets in an estate of, say, $4 million would be divided half and half between A and B spouses, thus doubling up on the exclusion. However, the creators of the AB Trust had to pay a price in the form of an income tax.