Previously, the maximum estate tax rate was 55%, and claiming the available tax exemptions required married couples to have a complex estate plan; like an “A-B Trust”.

The combined exemption is about $28 million today. A-B Trusts are not just obsolete for most people, but the unnecessary complexities in those trusts have consequences. 

 Before 2011: The “Use-It-Or-Lose-It” Dilemma 

Before 2011, if a married couple left all assets outright to the surviving spouse, the deceased spouse’s estate tax exemption was lost. Revocable Living Trusts with “A-B” provisions were therefore used to capture the first spouse’s tax exemption by dividing the trust assets into two parts upon the first death: 

• The B Trust (“Credit Shelter Trust”) would hold assets up to the maximum amount that could be exempt from federal estate taxes at the time of death. (IRC § 2010(c)).
• Everything else would go into the A Trust (“Marital Trust”) which remained exempt from estate tax until the surviving spouse’s death.

 After 2011: The Profound Impact of “Portability”

The American Taxpayer Relief Act eliminated the use-it-or-lose-it dilemma by making the first deceased spouse’s estate tax exemption “portable” by the surviving spouse without creating Credit Shelter and Marital trusts upon the first death (IRC § 2010(c)(4)). 

     If Your Revocable Living Trust Was Created Before 2011,

                         Be Aware Of The Consequences                                                  

 Loss of Second Step-Up in Cost Basis

Assets placed into a Credit Shelter Trust at the first spouse’s death forfeit their eligibility for a step-up in cost basis when eventually inherited by your heirs, resulting in a capital gains tax. (IRC § 1014). 

 Restricted Spousal Access to Trust Assets

Even when serving as Trustee of a Credit Shelter Trust, the surviving spouse does not have full access and control over its assets. Modern estate planning with portability would allow your spouse to retain full access and control and still preserve both estate tax exemptions.

 Unnecessary Administrative Duties.

A Credit Shelter Trust comes with a broad range of mandatory compliance obligations. In Florida, for example, the trustee must adhere to several key legal requirements, including:

• § 736.0810 & 736.08135, Fla. Stat. – A trustee must keep trust property separate from personal assets and maintain accurate books and records.
• 736.0813, Fla. Stat. – A trustee must provide annual accountings and relevant information to qualified beneficiaries.
• 26 CFR § 1.6012-3(a) – A trustee is required to file IRS Form 1041 annually if the trust has any taxable income or gross income exceeding $600.
• 518.11, Fla. Stat. – A trustee must invest trust assets prudently in accordance with Florida’s Prudent Investor Rule, considering diversification, risk, and return.
• 736.0816(20), Fla. Stat. – A trustee must make timely and proper distributions in accordance with the trust’s terms.

Warning Signs Your Trust May Be Outdated

• Your living trust was drafted or last updated before 2011.
• Your trust requires automatic funding of a Credit Shelter Trust at the first spouse’s death.
• The surviving spouse has limited control over inherited trust assets or can only access principal for “HEMS” purposes.
• Your trust does not reference portability or “DSUE” election planning.
• You never filed an estate tax return (Form 706) after a spouse’s death, even if no tax was owed.
• You have a second spouse or blended family, but the trust lacks flexibility for changing circumstances.
• Your heirs are subject to capital gains taxes on inherited assets.

 Why FirsTrust?

At FirsTrust, our advisors are not simply investment professionals. Our FinancialTeam includes experienced fiduciaries with advanced knowledge in trust design and estate tax planning. We help clients adapt their estate plans to current law and changing life circumstances, always with an eye on long-term family wealth preservation.

Let us know if you’d like a free review of your estate plan. We aren’t lawyers, insurance salesmen or commission-paid financial planners: no cost and no sales pitch.

Author: Michael T. Koenig, CFP®, J.M., the Founding Partner of FirsTrust, LLC, candidly shares his experience as a financial advisor to advocate truth and transparency for financial service consumers. His background includes a bachelor’s degree in psychology from the University of Maryland, a master’s certificate in finance from George Washington University, a Juris Master of Law degree from Florida State University College of Law, the CFP® Certified Financial Planner™ professional designation, and over 35 years of experience as a professional financial advisor.