2013 Federal Estate Tax Changes

In 2013, there were changes to the federal estate tax rules. Starting in 2013 the gift tax exemption was set at $5.25 million per person, indexed for inflation. That means that for anyone who dies in 2013, the first 5.25 million of their estate avoids estate taxes, if none of the exemption was used by making lifetime gifts. For estates that were taxable the maximum rate was 40%. Spouses can make unlimited tax-free gifts and bequests to each other, so long as the receiving spouse is a US citizen.

Married couples retain the exemption portability that was created by the 2010 tax. After one spouse dies. the surviving spouse can use both their own lifetime exemption and the deceased spouses exemption that was not used to shelter assets. Portability gives married couples a true joint exemption, which is $5.45 million each spouse in 2016. Unlike pre2010 law, spouses don’t have to be concerned about making sure each spouse has title to enough property to properly fund and use their maximum lifetime exemption.

So, the question I hear all the time is “Do you still need a bypass (marital deduction, AB trust) trust?”. Under the old law the main reason to use a trust was to take full advantage of the lifetime exemption while being able to continue to provide for a surviving spouse. At this time, unless you estate is greater than $10 million you no longer need a bypass trust for that reason. But, there are many other reasons a bypass trust can be an important part of your estate plan.

1. Controlling from the Grave. You may want to provide for your spouse, but you also want to ensure you give to those you want to receive it at a specific time or age. You can give to your family when you want.

2. Keeping your intentions. Some people are concerned a spouse may remarry and may leave the money to a new souse and other new family members. Some are already in a second marriage and may not believe their spouse will leave any of the estate to the children of the first marriage. A bypass trust benefits those to make sure your intentions were carried out.

3. Creditor Protection. Placing assets in a trust often times protects them from the creditors of your love ones. Creditors can be lawsuit winners, credit card companies, business partners and ex-spouses. It can assist family members who have made bad financial choices, or have trouble controlling their spending. If your family has financial issues, issues with an unhappy marriage or may be subject to lawsuits then considering a bypass trust may be beneficial.

4. Estate taxes. Ohio no longer has estate taxes, so this is no longer a worry.

5. Your money is making money. The estate tax is on your assets at the time of your death, so maybe you don’t have $10.9 million today, but your money will grow and who is to say you won’t have that or more at the time of your death. You can move future growth out of your spouse’s estate and still allow them to benefit from the assets by leaving some of it to a bypass trust.

6. The IRS regulations. If your executor does not follow the IRS regulations, then any unused exemption could be lost. A bypass trust makes sure that the exemption is used and not lost due to an executor error.

With all this being said, there may be a potential issue to using a bypass trust. When a spouse inherits from their spouse, he increases the basis to their current fair market value. In other words, the asset gets a step up in basis. When the spouse dies, whoever inherits the asset increases the basis again to the current fair market value. When the assets are then distributed to the beneficiaries from the trust the asset will take the same basis the trust had. It does not matter how much time has passed. Assets that have high growth may not be the best asset to place into a bypass trust for this very reason.


Probate is the legal process of administering a person’s assets after their death. It involves taking legal custody of a decedents assets, paying legitimate creditor claims and distributing the remaining assets to those beneficiaries entitled to them in accordance with the decedent’s will or in accordance with the state’s intestate succession rules. Intestate succession statutes rule the distribution of a decedent’s estate if the decedent had no valid Last Will and Testament at the time of their decease. Many times, probate can be expensive and time consuming. The probate process is available to the public, so the process exposes the decedent’s financial affairs to public scrutiny.

Some assets can be transferred without going through probate, such as property that automatically transfers because it is owned jointly with others with rights of survivorship or as tenants by the entirety. Retirement plan accounts, annuities, paid on death accounts where a valid individual beneficiary is designated are transferred by operation of law, without the need for probate.

A trust is a legal entity established by a Grantor through an agreement or a court order which allows a person or entity called a Trustee to control the assets for the benefit of a third party beneficiary. The Trustee manages and distributes the trust property according to the terms of the trust. When setting up a revocable living trust, which is the most common trust, the grantor should ensure the assets are transferred into the trust. The transfer simply means that the assets are titled into the trust’s name, which avoid probate upon the grantor’s death. A common error is to create a revocable living trust but not to re-title the property to the trust. If an asset is titled in the decedent’s name and not the trust’s name, then upon the death of the owner the asset will be part of the decedent’s probate estate.

What is the Procedure for Paying the Policy Premium for an Irrevocable Life Insurance Trust (ILIT)?

I make sure to tell my clients that in order to qualify the premium payments as “gift tax free” a certain procedure should be followed.  The Trustee of the ILIT should have a tax identification number and then create a checking account.  This should be done with plenty of time (at least 45 days) prior to the date the annual premium is due.  Next, the Trustee should send out the Crummey Letters to the beneficiaries of the ILIT.  This advises the beneficiaries of the contribution to the ILIT and informing them that they have a certain time period under the terms of the ILIT where they can withdraw the funds which are attributed to their shares. Continue reading