In 2012 Congress passed The American Taxpayer Relief Act, a new tax law that included 2 major changes.
- Estate/Gift Tax Exemption increased to $5 million each (adjusted for inflation). The individual exemption for 2015 is $5.43 million.
- The Estate Tax Exemption was made portable between spouses.
While both of these changes are beneficial they triggered a need to update most estate plans that were created prior to the 2012 law (and some trusts created after 2012). Revocable trusts created for a married person prior to 2012 likely have an outdated allocation formula.
Under the new law this old formula is now inapplicable and can have negative consequences. The old formula requires the funding of a bypass trust after the first spouse dies and re-titling assets. Under the new portability laws, this is no longer necessary. If a trust isn’t properly updated it could result in the following consequences:
- Excess administrative costs
- Extra income tax return each year
- All trust assets must be re-titled (real property, accounts, etc.)
- Higher tax rates
- Additional exposure to the 3.8% surtax
- Loss of step-up in income tax basis on the death of the second spouse
We recommend that every revocable trust for a married couple that was created prior to 2012 be amended to include a more efficient allocation formula.
With our amendment we will simplify the trust formula so that it will not require re-titling of assets. It also limits exposure to higher tax rates and the 3.8 surtax on investment income, and may reduce the number of tax returns. Our updated formula provides additional flexibility while simplifying administration and capturing the tax benefits of the new law. We are unique in providing a formula that provides all possible tax benefits without requiring a re-titling of all of your assets after the death of a spouse.
Call us at 801-765-0279 for a free review of your revocable trust.