When I started practicing law in 1995, the federal estate tax exemption amount was $600,000. That was the amount of property that a person could pass to his or her descendants without any federal gift or estate taxes. And back then, the exemption amount was not transferable between spouses. If one spouse died without using his or her exemption, it was lost forever. It was common then for middle-class families to pay estate taxes.
Between 1995 and 2017, the exemption amount gradually increased, initially from $600,000 to $625,000; then to $650,000, $675,000, and so on. By 2010, the exemption amount had reached $5,000,000 per person and it became transferrable so that any unused exemption could pass to a surviving spouse.
Under the Trump tax law, officially known as the “Tax Cuts and Jobs Act,” the exemption amount doubled to $11,180,000 per person. Today, the estate tax affects less than one-half of one percent of Americans. The rest – 99.5% of all Americans – will not be subject to the estate tax.
Just a few years ago lawyers were busy helping middle-class American families minimize estate taxes, often through the use of trusts. The most common types of tax-saving trusts are credit shelter trusts, QTIP trusts, and irrevocable life insurance trusts.
Many trusts that were created years ago still exist today. But are they necessary? If not, then what should we do with these old trusts?
First, don’t be too quick to conclude that the trust is obsolete. The current $11,180,000 exemption ($22,360,000 for a married couple) is not permanent. Under current law, the exemption will revert to 2017 levels (adjusted for inflation) in 2026. Also, the estate tax is more about politics than about revenue raising, and a future Congress might very well decide that the current estate tax laws are too generous. In either of these cases, a trust that seems unneeded today might be quite useful a few years from now.
Second, keep in mind that some trusts have more than one purpose. The principal purpose of an irrevocable life insurance trust is to immunize a life insurance policy from federal estate tax. But it might also include specific benefits for different family members, like support for the spouse first and the kids later.
Third, remember that many trusts offer some protection for beneficiaries against creditor claims. Before you terminate a trust, consider whether this protection might be useful to one of the beneficiaries.
If you discuss these and other possible benefits of your trust with your estate planning lawyer and decide that the trust is no longer needed or suitable for the purpose for which it was initially intended, several options are available.
There is plenty of good news here. First, gift and estate taxes have gotten better for taxpayers. And second, many good options are available for handling old trusts. Please reach out to me with any questions via email or by calling 317.428.6600.