The Planner's Perspective: Is Your Trust Flexible?

Paul Morrone |

By Paul Morrone CFP®, CPA/PFS, MSA

Estate and gift taxation, and all its inherent complexities, is a favorite target of regulators at both the Federal and State (if applicable) level. Changes to these regulations are often baked into much larger pieces of legislation and often do not receive the same publicity as the headline issues addressed by new laws. One common blind spot that is often overlooked may impact older trusts due to a Federal law enacted in 2010 when the Bush administration created the ‘portability’ election for use between married spouses. This provision allows a surviving spouse to treat any unused portion of their deceased spouse’s exemption (i.e. the dollar value of their estate assets not subject to estate tax) as their own, provided proper planning and administration occurs at the death of both spouses.  Many wills/trusts drafted prior to 2010 may not contain the appropriate language allowing the trustee to take advantage of the portability election which can result in an exemption amount that may be permanently lost. 

Portability became even more valuable as of 1/1/18 when the Tax Cuts and Jobs Act became effective which doubled the individual exemption to nearly $11.0mm per person. Under the new provisions, decedents passing away in 2018-2025 will enjoy an estate tax exemption of nearly $11.0mm per person, meaning that with only basic proper planning a married couple could shelter $22.0mm worth of wealth from estate tax. However, the temporary nature of these provisions leaves some uncertainty for the future. What will be even more interesting than the original passage of this provision, however, is what will happen in Washington after the estate tax provisions in the Tax Cuts and Jobs Act sunset in 2026. It is unclear whether a future congress will elect to maintain the higher exemption or let it revert back to $5.49mm for the 2026 tax year. Those with good memories may remember the ‘fiscal cliff’ which occurred at the end of 2012 when the Bush era tax cuts were set to expire. Shortly after the end of the year, Congress permanently extended those tax cuts in a bill signed into law in early 2013.

Here in Connecticut, the long delayed 2018 budget also included material permanent changes to the local estate tax laws as well, with laws that expand the exemption from $2.0mm in 2017 to $2.6mm in 2018, $3.6mm in 2019 and from 2020 on the exemption is set to match the federal exemption amount of $11.2mm per individual. The way the current law is written is that Connecticut’s exemption will match the Federal exemption for tax years 2020 and beyond. While this makes planning a bit easier going forward by not having to deal with unequal federal and state exemptions, the uncertainty of the estate tax exemption in 2026 at the Federal level may be felt even harder by Connecticut residents who will also see their state exemption cut in half if the exemptions are not upheld for future tax years.

Of course, it’s impossible to predict what is going to happen related to the taxation of estates and trusts in the future. In fact, it is not that long ago that the federal estate tax exemption level was a mere $650k. Even crazier is the fact that during 2010, the estate tax was repealed entirely. Yankees fans will remember this as the year that George Steinbrenner passed away with an estate valued over $1.2 billion dollars (which saved his heirs over $600 million in federal estate tax). This goes to illustrate the point that maintaining flexibility in your plan should be a paramount concern, as the timing of one’s death is never prescribed. With major changes in laws that became effective in 2018, now is as good of time as ever to dust off your will and trust and look at them with a fresh eye. 

This information is not intended to be a substitute for individualized legal or tax advice. Please consult your legal advisor regarding your specific situation. US Wealth Management, US Financial Advisors and LPL Financial do not provide legal or tax advice or services.