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Times Have Changed, and So Have Estate Planning Strategies

If you took today’s teenagers back to the year 2000, a vast majority of it would be unrecognizable. No iPhones existed and the internet was tied to a phone line that required a chorus of AOL dialup noises to access. Even going to the movies meant consulting a newspaper for showtimes. If the world has changed so quickly in such a short time, it’s unsurprising that estate planning recommendations from 2000 may not be the best choice in 2021.

In the last two decades, legislation at both the state and federal levels altered the pros and cons of some estate planning tactics, including Credit Shelter Trusts. If you have a credit shelter trust, also called an A/B trust, you may want to review your estate plan and determine whether this particular trust still aligns with your needs. Or if you are nominated the Trustee for your living parents’ trust, you may want to discuss with them whether their documents line up with their current goals.

Death Taxes: An Overview

Back in 2000, the estate tax exemption was $675,000. As it stands in 2021, the estate tax exemption is $11,700,000. Even adjusting for inflation, the threshold for needing to pay a penny in federal estate tax is 10x higher than it was twenty years ago. Granted, the 11.7 million dollar exemption won’t last forever – given no other changes, it should sunset after 2025 and return to around 5.49 million, adjusted for inflation. The Biden Administration is in talks to lower the estate tax exemption amount, possibly to $3.5 million, however, even at the end of the Obama presidency the estate tax exemption amount was 5.45 million. The Estate tax, like many US taxes, is progressive – meaning if your estate is 12 million dollars and you die today, the first 11.7 million is tax-free, with estate tax only against the 0.3 million over the exemption amount.

The point remains that even when the estate tax exemption was $5.49 million, 99.8% of estates owed no estate tax, and even those who were close could often avoid estate tax through means other than a credit shelter trust.

Understanding Credit Shelter Trusts

Credit Shelter Trusts, like owning a Blackberry, made a lot of sense in the early 2000s, as it allowed spouses to maximize their estate tax exemption amount by creating two trusts – a “marital” trust using the estate tax exemption amount, and a “family trust” that would allow the rest of the Grantor’s assets to stay in Trust, safe from Estate tax while still taking care of their spouse and eventually their children. However, maximizing the estate tax exclusion lost a lot of its benefit due to the advent of portability, which allows a widow or widower to add the leftover exemption from their deceased spouse’s estate to their own estate tax limit.

As an example, if Joe and Sue were married, and Joe dies in 2021 with 5 million dollars in assets (remember, the exemption amount is 11.7 million), Sue could file an estate tax return to add the 6.7 million dollars of excess exemption to her own exemption at her death. This means that if she dies in a year where the Estate tax limit was lowered back to 3.5 million, her exemption would total 10.2 million – her husband’s excess 6.7 million, plus her 3.5 million dollar exemption. If her assets are less than 10 million dollars, her estate pays nothing in estate taxes.

The other benefit of Sue keeping the money in her name is due to the reset in tax basis. If Joe died with $5 million of stock, but only paid $1 million for that stock, the capital gains he would have accrued upon the stock’s liquidation gets reset at his death. If the $5 million in stock grows to $10 million during Sue’s life, the step-up happens again – no capital gains tax would be paid when the stock transferred to her Trust.

This step-up is a reason to keep the money out of the Credit Shelter Trust at Joe’s death, or possibly alter the credit shelter trust in a way to allow for this step-up in basis at Sue’s death. Your estate may not incur estate tax but may incur significant capital gains tax.

Changes in Circumstances

Even if a credit shelter trust is best for you and your spouse, you may still want to review your documents for any other changes – your backup trustees from 20 years ago may not be the best choice in 2021, or you have grandchildren you would like to leave assets to who didn’t exist when your original documents were drafted. Between the changes in estate tax law and your own personal circumstances, reviewing your old estate plan is likely a good idea in 2021.

If you have questions about your estate plan or would like to update your current plan, give your CPM attorney or any member of our estate planning team a call. We would be happy to help!


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