New Changes to Estate Tax Exemptions Can Threaten Your Wills and Trusts

This year, the federal estate tax exemption jumped to $11.2M. And recently, the Maryland legislature increased the Maryland estate tax exemption to $5.0M (effective in 2019). So, with these higher numbers, you no longer have to worry about estate taxes in your wills and trusts, right?

Wrong.

Learn why these recent tax changes can endanger your estate planning — and how to keep the danger at bay — from Thomas and Libowitz’s head of Estates and Trusts, Charles Jones:

How to keep new estate tax exemption laws from endangering your wills and trusts

Now that the federal estate exemption is $11.2M per person and the Maryland Legislature has passed a new $5.0M per person estate exemption,* do you really need to worry about visiting your lawyer to make any revisions to your will or revocable trust?

You just might.

Old wills and old revocable trusts can contain old tax formulas. And when tax laws change, these outdated formulas can endanger the fiscal health of your family, particularly your surviving spouse. In other words, language designed to help you in 2008 might now hurt you in 2018. For example:

In 2008, the federal estate exemption was $2.0M per person, and the Maryland estate exemption was $1.0M per person. That would have included your home, life insurance, stocks, annuities, and any other items of wealth controlled by you prior to death.

Accordingly, to effectively plan around a potential federal and Maryland estate tax, a tax formula in your document would have created a credit shelter trust (sometimes referred to as a “by-pass” or “A/B trust”) to shelter the tax upon the first spouse’s death on the first $1.0M of asset value so that non-spouse heirs would not be forced to pay estate tax. The balance of the estate would pass to the surviving spouse, and he or she could shelter the remaining $1.0M upon his or her death.

This tax formula would be stated as follows: “I bequeath the maximum amount to the trustee of my credit shelter trust so that no federal or state estate tax is due, after applying any credits available … and leave the balance outright to my surviving spouse.” Of course, the “credits” referred to are the exemptions at the time of death (gross estate – available credit = amount for spouse).

Typically, the credit shelter trust is held for the benefit of the family group — often the spouse and descendants of the deceased, and sometimes including children from a prior marriage. But, in order to maintain the tax benefits, the spouse cannot have unfettered access to the assets and income of the credit shelter trust.

That was really good planning at the time. But, fast-forward to today and the situation is different.

Now, in 2018, the federal estate exemption is $11.2M per person, and the Maryland estate exemption is $4.0M per person. Let’s say you have done well in the past decade, and your estate is now $3.0M. If we still apply the 2008 tax formula, what is the result? The result is that the credit shelter trust is fully funded, and the surviving spouse gets nothing!

Is there a way to remedy this problem without revising your will or trust documents? Perhaps; for example, one might suggest splitting assets —but that is not always an option, especially if a spouse is unwilling to split asset ownership. Another option might be “portability,” a concept we will explore on this blog next month. In any event, it is wise to track how the assets will flow at the death of the first spouse, consider how the tax formula will impact that flow, and make adjustments.

Some might say: “Who wants to spend money on a lawyer when we know Congress cannot help itself from making future changes to the tax laws? It’s all so mercurial, such a waste of money.” Nevertheless, changes in tax laws mean that there may be great risk lurking in your current documents. And a small investment today to keep abreast of these changes and their impact on your surviving family will be well worth it tomorrow.

*Effective on January 1, 2019.

For more information, contact Charles Jones, head of our Estates and Trusts practice, at 443.927.2111 or by email here.