Using Income Tax to get the Best out of your Estate Plan

In recent times, estate planning has had to adjust to two major changes. One is that Federal estate tax laws now permanently allow for a larger estate tax exemption, currently set at $5.45 million for 2016 (adjusted for inflation each year). The second is that married couples can transfer any unused Federal estate tax exemption to a surviving spouse, so that the spouse can benefit from the additional exemption, tax-free. This concept is known as ‘portability.’ It means that many of the traditional tools of estate-planning, such as the need for automatic allocation between subtrusts on the death of one spouse are no longer needed, and may even have undesirable consequences.

As discussed in the National Law Review (, changes in estate planning have brought another factor into consideration: income tax. On the death of one spouse, the tax basis in particular assets owned by the deceased is adjusted to fair market value as of the date of death. When the surviving spouse dies, however, only the assets held in one of the subtrusts is adjusted to the fair market value upon their death. If you have set up another subtrust (for example a Credit Shelter or Bypass Trust), the assets here will continue with the same tax basis that was determined on the death of the first spouse. These assets may have appreciated, and beneficiaries under your estate plan may pay more in capital gains tax if automatic allocation is made between these trusts.

It may be wise following the death of one spouse to amend older estate plans and remove automatic allocation, so that all the assets pass to one subtrust. In addition, it’s important to remember that ‘portability’, ie availing of the first spouse’s estate tax exemption, must be elected on the estate tax return of the first spouse to die. When the estate plan has been amended to flow into one subtrust, the surviving spouse will have the ability to reallocate, or disclaim some of the assets, but the reallocation will be made this time after a consideration of the current income tax and estate tax situation, making the most of this, rather than being penalized by calculations made at previous rates.

The attorneys at Valanzola Law Group ae experienced lawyers who are happy to help you guide you through the process of estate planning. Please contact us for expert help on crafting your estate plan:

Published on March 23, 2016