If you and your spouse updated your estate plan several years ago, there is a strong likelihood that your plan includes the well-known “AB Trust.” This part of your plan may also be known as a “Bypass Trust,” a “QTIP,” or a “Marital and Family Trust.” For many years, the AB Trust was the only possible way that a married couple could double their federal estate tax exemptions. In 2011, for the very first time estate planning laws were changed to allow “portability” of estate tax exemptions from one spouse to another. This new law allows a surviving spouse to claim any unused federal estate tax exemption when their spouse passes away. Because this “portability” has become a permanent part of federal estate tax laws, your old AB Trust planning could possibly be harmful rather than helpful.
Follow this story for an example of the benefits of the portability of exemptions:
Sam and Judy had been married for 37 years when Sam died in 2013. Because of the new portability law:
- Judy can add Sam’s unused estate tax exemptions to her own.
- Any of Sam’s property which passes to Judy from either Sam’s estate, his revocable trust, or by right of survivorship will automatically take a full step up in income tax basis and receive the fair market share when Sam dies.
- Another step up in income tax basis will be received by Judy’s beneficiaries when she passes away.
If Sam and Judy had never updated the estate plan that they drafted in the 1980’s, they will likely have a plan that includes an old AB Trust (which, at the time, was a great way to make full use of the federal estate tax exemptions available to each spouse.) The problem with the old AB Trust is that any heirs will not receive the benefit of a step up in income tax basis on those assets that remain in the B Trust after Judy passes away. Judy’s beneficiaries will, instead, inherit those assets at an income tax basis that was calculated in 2013 when Sam died. The longer that Judy lives, the higher the income tax bill is likely to be if Judy’s heirs sell the assets at a later date.
This is not to say that there is nothing positive about AB Trust planning. Married couples with an estate plan that is more than a few years old should sit down with an estate planning attorney and find out which parts of the AB Trust still work for them. We believe that your current estate plan can likely be revised in order to maintain the positive features of the AB Trust planning while gaining the additional benefit of a step up in income tax basis that comes through the portability of federal estate tax exemptions.