Passing Assets to Surviving Spouse: Do I Need to Pass the Assets in Trust for Tax Reasons?


It’s Richard Morgan at Morgan and DiSalvo. Another of our video newsletters. This topic relates to the question of whether a married couple, whether the first spouse to die should pass their assets to the surviving spouse, in trust, to gain a tax advantage. Let’s talk about why this is even an issue. Under the estate tax system, both spouses get an exemption from the estate tax. Before 2013, it was difficult to get the first spouse’s exemption. Let me tell you why. When the first spouse dies, if they give all their assets to the surviving spouse outright, it qualifies for what’s called the Unlimited Marital Deduction. It’s a totally free transfer. The government allows you to transfer assets back and forth between spouses, unlimited, because they figure they’re going to get their money at the second death. So, when the first spouse to die gives all their money to the surviving spouse outright, they had an exemption, but they didn’t need it, so it just went poof and went away. Now the surviving spouse owns all the assets and has one exemption.

So the key before 2013 was how do I benefit the spouse and use the exemption so I don’t lose it. The way we came up with … I didn’t come up with it. This is before I started working in ’87 … is we used a particular type of trust called a Credit Shelter Trust or a Bypass Trust. Instead of giving all the assets to the spouse outright, we would give at least part of those assets to the surviving spouse, in trust. Normally the spouse is on the one in control as the trustee and is either the sole beneficiary or primary beneficiary, kids the secondary. But practically invisible, but technically and legally effective to use that first exemption.

What happened in 2013, or under the 2012 Tax Act, is we had two things happen. Number one, we now have portability, which instead of that trust, the surviving spouse or the executor of that first estate, can file a timely estate tax return and that elects this thing called portability, which just transfers over the unused exemption. No trust needed. The second reason is that we don’t need it for most people … that trust anymore for tax reasons … is because the exemption has gone up from effectively about a million to 2013, it went to about 5 million. Indexed for inflation, that number today would be 5.6 million. Under the temporary Trump 2017 Tax Act, that number is effectively doubled. Today that number is 11.18 million. It will go away at the end of 2025 unless it’s extended.

So we have at least 5.6 million rising with inflation. We may have 11.18 rising with inflation. Plus, we have portability. So from estate tax perspective, 99 … or under the 11.18 number … we’re probably at 99.5% of the population does not have an estate tax problem even to consider. Maybe .2 of 1% will actually pay a tax. Under the 2013 five million indexed number, which is 5.6 million today, we’re probably at 98% of the population doesn’t have a problem as long as you have portability, and maybe 1% will actually pay an estate tax. So, for the mass majority of the population you don’t need to do the trust anymore for estate tax reasons.

Richard Morgan: It’s Richard Morgan at Morgan and DiSalvo.

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