Modification of Trusts Due to Increase of Estate Tax Exemption

By: Ronald L. Siegel

In light of the 2018 Tax Act, there are several situations that could make it advantageous to modify or revise a Trust, even an irrevocable one.

The exemption against federal estate tax has increased drastically over the last 20 years.  In 1997, the exemption amount was $600,000.00.  In 2017, the exemption was $5,490,000.00, and under the 2018 Tax Act, it has risen to $11,400,000.00 in 2019.

Because of this substantial increase in the exemption amount, very few estates will incur federal estate tax.  Accordingly, achieving basis step-up becomes a more significant goal.

When a person dies, the basis of the assets for income tax purposes is adjusted to date of death value.  If the assets have appreciated since purchase, this is a substantial benefit, as it reduces or eliminates capital gains tax on the sale of the asset.

However, when assets are left in a traditional Credit Shelter Trust for the benefit of the surviving spouse, the assets do not get a second basis step-up when the surviving spouse dies.  With most people not having to worry about estate tax, this creates two opportunities:

1. If both spouses are alive and their estate planning documents provide for a Credit Shelter Trust, it should be re-examined to determine whether such a Trust is still appropriate. Although there are reasons why it could be appropriate to continue the Trust, it may be preferential to either leave assets outright to the surviving spouse, or to create a Power of Appointment within the Credit Shelter Trust so as to intentionally cause it to be includable in the surviving spouse’s estate for estate tax purposes, thus creating that second basis step-up at the surviving spouse’s death.
2. If one spouse is deceased but the surviving spouse is still alive, consideration should be given to modifying or terminating the Credit Shelter Trust to achieve second spouse death basis step up. Even though the Credit Shelter Trust presumably became irrevocable at the first spouse’s death, there are situations where such a Trust can be modified or terminated, either by the action of the Trustee alone, by the Trustee and all the Beneficiaries, or by going to court.  Which method(s) are available in a given situation will vary, and tax consequences should be considered.  Consent of the Beneficiaries is typically required, but depending on the situation, this could be beneficial for all parties.

Because a Trust does provide many other non-tax benefits, such as creditor protection and protection of Beneficiaries, it is certainly not appropriate to terminate or modify a Credit Shelter Trust in all circumstances.

The above are examples why an estate plan should be periodically reviewed, preferably every year or two.  Other situations that make a review appropriate are changes in circumstances, such as a death, a birth, a marriage, a divorce, a health problem, or significant change (upward or downward) in net worth.  Changes in the laws are also a reason to review estate plans periodically.

With more than 30 years of experience, attorney Ronald L. Siegel is a Florida Bar Board Certified specialist in Wills, Trusts and Estates. From his office in Boca Raton, Florida, he focuses his practice in all aspects of estate planning, probate, trust administration, guardianship and real estate.  He can be reached at 561-241-3113.