Byron R. Berry

If you had a Will prepared by an attorney who did estate and tax planning in the 80’s, 90’s or early aughts, it probably had provisions to avoid estate taxes. This was a great idea at the time because for most of that period the maximum estate tax rate hovered around 50%. Simply put if your taxable estate was one million dollars, your estate would be liable for estate taxes to the tune of half a million dollars. And if you didn’t leave $500,000 cash laying around, your heirs would have to liquidate part of your estate to pay Uncle Sam.

Take a look at your Will and if it has terms such as “Share A” and “Trust B” or “Marital Trust” and “Family Trust” the odds are that your attorney knew something about the Tax Code and was trying to maximize the Unified Credit to reduce your tax liability – in other words avoid estate taxes. The odds are also pretty good that unless you undo this, your estate will have to pay significantly more taxes than had you just forgot about tax planning and left everything to your spouse free of trust. Why? Well in short, the amount you can leave tax-free went up over $5 million per spouse, what you don’t use your spouse can have and the capital gains tax went to 20%.

I’ll try to give an example. Let’s say you had a Will in prepared 2010 and your taxable estate was exactly $1 million but you knew your assets were going to appreciate over the next few years to $5 million. Let’s also assume that in 2010 the Unified Credit allowed $1 million to pass tax-free.

The wise thing to do in 2010 was to put the property in trust, use your $1 million tax-free gift and that way when the property comes out of trust to your kids, they don’t have to pay estate taxes on the $4 million of appreciation. Their basis in the property would be $1 million and if they sell the property for $5 million they would have a capital gain of $800,000 (20% of $4,000,000) but they would avoid the 50% estate tax rate which in the example would be $2 million (50% of $4,000,000).

So if the tax-free amount stayed at $1 million we would have saved $1.2 million ($2,000,000 – $800,000). There’s just one catch. The tax free amount went up to $5 million. (Actually its more now but for this example I am keeping very round numbers.)

So now had you not put the property in trust – and if you die in 2015 – your heirs would have a “stepped up” basis in the property to today’s value of $5 million which is the tax free amount for estate taxes. So if they sell the property for $5 million they will have no capital gain of $800,000 and no estate tax.

But if the property was put in trust in 2010 the basis is $1 million not $5 million so you would still have the capital gains tax of $800,000.

In short, had you held on to the property until your death here in 2015 your heirs would pay $0 in either estate tax or income tax.

Now the good news is you are alive and reading this article and can still do something about it.   Trusts are great tools for estate planning for a lot of reasons however you should review your Will and Trust every couple of years just for instances like this where there has been significant changes in the law.

If you are ready to have a Will or Trust prepared or reviewed, please contact us at (940) 387-3518.