In a recent WSJ Wealth Advisor article, The New Rules of Estate Planning, Laura Sanders asks, essentially, whether revocable trust based planning has become obsolete. The article helpfully explains some of the changes since the passage of the American Taxpayer Relief Act, but fails to discuss some important aspects of trust planning and, in fact, might mislead some regarding how planners continue to use trust-based planning. Trusts can be used for tax planning but they have many additional purposes, including ensuring gifting intentions are accomplished as between spouses, ensuring adequate disability and incapacity planning, avoiding probate and ensuring privacy.
The article discusses why it is a bad idea for a 94 year old man to transfer a highly appreciated vacation home to his children during his lifetime. By waiting till death to make the transfer, he can ensure that his children get a stepped up basis in the home equal to fair market value at his death. Such a lifetime or “inter vivos” transfer was usually a bad idea both before and after ATRA.
In addition, while unused exemption amounts (“DSUE”) can be “ported” by surviving spouses, there are other techniques that we use to ensure protection of the DSUE. For instance, planners can create trusts that hold appreciated assets at the death of the first or second spouse and at the same time ensure that the appreciated property has a basis equal to fair market value on the date of death of the spouse. This allows use of a trust to ensure gifting intentions are met and at the same time allows the step-up. Initially, the increased exemption and portability under ATRA created some confusion and difficult questions about planning, particularly for couples with asset values “between the exemption”, that is between $5 and $10 million. However, now planners and their clients have become quite adept at recognizing the increased options and benefits under the new law. Sometimes effective planning is a bit more complex under the new rules, but effective planning can involve obtaining the best benefits of trust based planning and other techniques available under ATRA.