Issuu

E-14 NOVEMBER 10-16, 2014

ESTATE PLANNING

TRUSTS

Is AB Trust planning a notion of the past? Trust, and incorporating the ability to achieve a second step-up in tax basis upon the death of the surviving rior to the American Tax Payer spouse. An OBIT is similar to an AB Relief Act of 2012 (ATRA), the Trust in that the surviving spouse’s use of a Marital Trust (Trust A) access to the assets is limited — howand a Credit Shelter Trust (Trust B), ever, these limitations exist for asset commonly referred to collectively as protection purposes instead of estate an “AB Trust” was considered stantax planning purposes. dard procedure in estate planning Based on current tax law, an for wealthy married couples. OBIT functions as follows: ATRA established changes that Upon the death of the first spouse, brought a much-desired federal estate $5.34 million in assets (less tax permanence by setting the amount of any unified the unified credit amount at credit used during lifetime) $5 million indexed for inflais directed to the Credit tion ($5.34 million in 2014) Shelter Trust (Trust B) for and introduced the concept the benefit of the surviving of portability. Prior to the spouse. Similar to an AB concept of portability, if a Trust, this amount will pass spouse’s unified credit was tax-free pursuant to the use not used at death, the unified DECAPITE of the deceased spouse’s $5.34 credit was lost. After portamillion exemption. bility, the surviving spouse In an OBIT, Trust B is is able to use a deceased spouse’s uncarefully drafted to include a testaused exemption amount by electing mentary general power to appoint portability on the federal estate tax appreciated trust assets, thereby return. As a result of this decrease in allowing for the appointed assets estate tax exposure, the use of an AB to be includable in the surviving Trust has become much less useful in spouse’s estate for federal estate tax planning, as a bypass trust is not tax purposes. The general power necessary to preserve the deceased of appointment is granted only if it spouse’s exemption amount. While will not cause the appreciated the AB Trust remains functional in assets to incur estate tax liability. the estate planning arena, there are Upon the surviving spouse’s death, other forms of trust planning that can this arrangement provides for an be used to achieve complex income additional step-up on assets that have tax planning strategies. appreciated in value from the date of death of the first spouse to the date OBIT as an option of death of the surviving spouse, and prevents a step-down on assets that The Optimal Basis Increase Trust have decreased in value. Without the (OBIT) allows for income tax planning OBIT provisions, a traditional AB strategies that are notably absent in Trust would only guarantee a step-up the traditional AB Trust structure. in basis upon the first spouse’s death. The OBIT takes a hybrid approach Another drafting approach used to by combining the benefits of an AB BY DANA DECAPITE

accomplish an OBIT involves the use of a Delaware Tax Trap technique, under which a limited power of appointment is granted to the surviving spouse. The surviving spouse can then appoint appreciated assets into an additional trust that allows for an exercisable general power of appointment. This technique creates the same tax advantage wherein appreciated assets are stepped up, depreciated assets are not stepped down and asset protection is achieved. However, there are a number of complex planning considerations in determining which technique is best, such as: gift tax considerations, access by the powerholder’s estate creditors, ease of disclaiming/decanting and the hassle of future documentation and upkeep upon the death of the first spouse. Regardless of the drafting approach, it is clear that the planning techniques have taken a dramatic shift since the implementation of ATRA. While the necessity for estate planning has not diminished, tax incentives have shifted clients from traditional estate tax planning to a new focus on income tax planning. These techniques are particularly attractive to high-income taxpayers who wish to utilize strategies to minimize income tax liability while also preserving asset protection for beneficiaries. As a result, the traditional AB Trust has become less useful in certain contexts, and complex trusts similar to the OBIT are now being used to maximize income tax savings at death.

Dana DeCapite is an Associate in the firm’s Business Succession Planning/ Wealth Management Practice Group. Contact her at 216-383-4443 or ddecapite@beneschlaw.com.

The non-tax benefits of trusts

The planner should follow up that concept with many associated questions. For example, do you have minor children or any chiln the past, the estate planning dren from a first marriage? Is there discussion between attorney a possibility that a child might get and client regarding the use divorced or declare bankruptcy? Is of trusts was often centered on getting a large lump sum of money the way a trust may be able to in the best interests of your child, help save on estate taxes. Howor might that deter them from findever, with the federal exemption ing their professional and economic for estate taxes currently being way on their own? What if your $5,340,000 per person and the surviving spouse remarries and, if repeal of the Ohio estate tax, planthey do, would you care if your asners are often asked by clients “Do sets are available for that I really need a trust?” The new spouse and family? answer generally is that Generally few, if any, while you may not need clients can answer no to a trust to save on estate all of the questions raised taxes, you might want a above. If he or she can, trust for a variety of other then trusts may not be reasons. for them. If any of the A funded trust provides answers are yes, then the privacy and avoids the options of how a trust can DELACOURT probate process. A funded assist them in their situaSUMMERS trust streamlines asset tion should be explored. management and distribuA trust still might not tions upon the incompebe the correct, or only, estate tency and/or death of the creator of planning vehicle for that client, the trust and names a succession but at least the option should be of trustees, presumably, ready to discussed and the planner and cliserve. Most notably, however, is ent can delve into the client’s own that a funded trust allows you to unique personal situation – instead maintain control of your assets while you are alive and dictate how of just discussing tax savings. The non-tax benefits of trusts they are to be used and for whom have always been there, they just after your death. were not in the spotlight as they Many times, when a planner are now. asks a client what should happen with their assets upon their death, Linda DelaCourt Summers is the client replies that their assets counsel for Ulmer & Berne LLP. should be distributed to their Contact her at 216-583-7212 or spouse, if there is one; otherwise, ldelacourt@ulmer.com in equal shares to their children.

BY LINDA DELACOURT SUMMERS

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