It’s that time of year…tax season. When most of us think of tax season, we think of our individual and business tax returns since these are the most common tax forms.
Most of us do not think of the tax obligations relating to trusts—but many of us should.
Many of my clients are surviving widows or widowers who had trusts drafted with her or his spouse a number of years in the past. Today, with Congress’ recent tax changes, the estate tax exemption per person is $11 million (or $22 million for a married couple). This means an individual person can have $11 million in assets upon death without estate taxes.
However, a number of years ago, the estate tax exemption was significantly lower. For instance, the exemption was only $675,000 in 2001. As a result, many estate planning attorneys commonly drafted “A-B” Trusts for clients. When the first spouse passed away, the trust became split into two components—the Survivor’s Trust and the Decedent’s Trust.
In 2001, the benefit of the “A-B” Trust was that it allowed the survivor to “fund” the Decedent’s Trust with assets to preserve the decedent’s $675,000 exemption limit. This was important because many more people were paying estate tax back then with lower exemption limits than people pay now with an $11 million exemption.
Nowadays, an “A-B” Trust does not make sense for most of my clients. The most negative aspect of an “A-B” Trust is that it must be split into two trusts when one spouse passes away into the Decedent’s Trust and the Survivor’s Trust. The Decedent’s Trust becomes an entity like a corporation and becomes irrevocable, which means the trust cannot be changed. This means the surviving spouse must manage two trust instead of one.
Additionally, what most people don’t know is that many surviving spouses should likely file a trust tax return for the Decedent’s Trust. As an entity, the Decedent’s Trust should have a tax return if it has income above $600.
Without going into too much legalese, if you are a surviving spouse you should speak to an attorney or tax professional about your trust tax obligations. If you are currently married and have an older trust, you should speak to an attorney about potentially having your trust redrafted. With the change in the exemption limits, attorneys have changed the ways they draft trusts. It is very important for you to know the consequences for the type of trust you choose to have drafted.
Tony does not charge for initial consultations. For more information, please contact Tony at 5703 Temple City Boulevard, 626-285-7033, or firstname.lastname@example.org.