Potential Planning Opportunities with a Decedent’s Trust
By Kevin Eggebraaten, CPA
Over the years one of the tools of estate planning was to establish a decedent’s trust (DT) along with a survivor’s trust (ST) upon the 1st to die. In part, the planning was to carve out the DT assets that would not be part of the estate of the survivor and therefore not be taxed when the 2nd to die happens.
This strategy worked well for many clients, but with only .15% of the estates owing estate tax, (1) the planning in 2015 and forward for some estate plans has shifted to dealing with low basis assets that are held in a DT. Income tax planning has become much more of the focus with the increase in the unified credit to $5,430,000 in 2015. This planning opportunity will not be for everyone.
Consider whether the ability to make a principal distribution (if the trust document allows) from the DT into the ST could make a difference in the overall tax paid to the Department of the Treasury. (2)
Let’s look at a real life example.
1st to die established DT with appraised land that went into the trust upon death valued at
$185/acre on 2,000 acres for a current value in 2002 of $370,000.
Current Value (2015) of the 2,000 acres is roughly $1,750/acre for a total of $3,500,000.
The survivor is worth an estimated $3,000,000.
If survivor died in 2015 this would leave appreciated asset value of $3,130,000 in the DT and the beneficiaries would pay an estimated $745,000 in federal taxes if they sold the 2,000 acres (3).
The survivor in my example has an ability to draw out 5% of the principal each year from the DT that would be around $175,000 without any discounts applied in the valuation process. This would save the beneficiaries an estimated $41,650/year in federal taxes that wouldn’t have to be paid upon the death of the survivor.
There are many other planning opportunities that potentially need to be discussed with your attorney and tax advisor to assure compliance and see if there are any tax savings strategies. Remember it is “not how much you make, it is what you or your beneficiaries/charities get to keep”.
Risks Are Real!
Federal estate tax exemption amount goes down from $5,430,000 because of congressional action. If this happens survivor has potentially brought assets back into his/her estate that would now be taxed upon his/her death. Beneficiaries balk at the transaction for whatever reason. Creditors may now have access to assets that they didn’t have before. Land values skyrocket and now the survivor is over the $5,430,000 limit and therefore faces estate taxes. What is the fiduciary responsibility of the trustee? Other concerns not mentioned that would be specific on a case by case basis.
According to the Urban-Brookings Tax Policy Center January 9, 2015
see Risks are Real for potential pitfalls
does not include potential state income tax considerations and their other
income being taxed at a higher rate