Is Your Family Trust Outdated?

Is Your Family Trust Outdated?

Is Your Family Trust Outdated?

“…In this world nothing can be said to be certain, except death and taxes.”
-Benjamin Franklin

The Federal Estate Tax
While taxes are certain, how much you will pay in taxes is not. And in case of the estate tax Congress found a way to combine both death and taxes. In 1999 if you were worth over $650,000 when you died your heirs would pay a federal estate tax, sometimes referred to as the “death tax,” based on every dollar above a $650,000 exemption. A decade later in 2009 the exemption amount was $3.5 million, and a decade after that in 2019 the estate tax exemption jumped to $11.4 million.

The A-B Trust
To ward off the death tax and keep it from afflicting inheritances estate planning attorneys in the 1980’s and 1990’s typically drafted A-B trusts for married couples. When one spouse died the trust assets would split into an A Trust (also known as the Survivors Trust) and a B Trust (also known as a Decedents Trust, Bypass Trust, or Exemption Trust). An amount equal to the estate tax exemption funded the B Trust and would forever be exempt from estate taxes no matter what growth occurred. The surviving spouse would live off the A Trust and get an estate tax exemption on the value of that trust when s/he passed away.

Advantages
There are some advantages to a trust splitting into an A Trust and B Trust upon the first death. In theory, since the B Trust is irrevocable and can no longer be altered, it offers beneficiaries protection from creditors and protects the deceased spouse’s ability to pass along an inheritance to his/her children even if the surviving spouse remarries.

Disadvantages
Splitting up an estate is a pain and it can be costly. The surviving spouse may need to hire an attorney, will need to apply for a separate Tax ID number for the B Trust, and must file an additional tax return every year just for that B Trust. Ouch. Another significant disadvantage is a partial loss of a second step-up in basis. When the first spouse passes away appreciated assets receive the current value for tax purposes. When the second spouse dies their heirs will get a step-up in basis for assets held in the A Trust but will have to pay capital gains taxes on assets held in the B Trust which could be substantial.

Restate Your Trust?
With the federal estate tax exemption currently at $11.58 million per spouse it may make sense to restate your trust and remove the A-B provision. You will avoid the hassles a B Trust creates and give your heirs the potential for a second step up in basis. Be careful to check if your state assesses an estate tax in addition to the federal estate tax. A dozen states including Illinois have an estate tax with a lower threshold than the federal exemption of $11.58 million.

You should also review your trust if you have not looked at it lately for potential changes you may need to make to your list of successor trustees and beneficiaries. Please consult with your estate planning attorney for advice on your specific situation. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional.

Is Your Family Trust Outdated?

Is Your Family Trust Outdated?

“…In this world nothing can be said to be certain, except death and taxes.”
-Benjamin Franklin

The Federal Estate Tax
While taxes are certain, how much you will pay in taxes is not. And in case of the estate tax Congress found a way to combine both death and taxes. In 1999 if you were worth over $650,000 when you died your heirs would pay a federal estate tax, sometimes referred to as the “death tax,” based on every dollar above a $650,000 exemption. A decade later in 2009 the exemption amount was $3.5 million, and a decade after that in 2019 the estate tax exemption jumped to $11.4 million.

The A-B Trust
To ward off the death tax and keep it from afflicting inheritances estate planning attorneys in the 1980’s and 1990’s typically drafted A-B trusts for married couples. When one spouse died the trust assets would split into an A Trust (also known as the Survivors Trust) and a B Trust (also known as a Decedents Trust, Bypass Trust, or Exemption Trust). An amount equal to the estate tax exemption funded the B Trust and would forever be exempt from estate taxes no matter what growth occurred. The surviving spouse would live off the A Trust and get an estate tax exemption on the value of that trust when s/he passed away.

Advantages
There are some advantages to a trust splitting into an A Trust and B Trust upon the first death. In theory, since the B Trust is irrevocable and can no longer be altered, it offers beneficiaries protection from creditors and protects the deceased spouse’s ability to pass along an inheritance to his/her children even if the surviving spouse remarries.

Disadvantages
Splitting up an estate is a pain and it can be costly. The surviving spouse may need to hire an attorney, will need to apply for a separate Tax ID number for the B Trust, and must file an additional tax return every year just for that B Trust. Ouch. Another significant disadvantage is a partial loss of a second step-up in basis. When the first spouse passes away appreciated assets receive the current value for tax purposes. When the second spouse dies their heirs will get a step-up in basis for assets held in the A Trust but will have to pay capital gains taxes on assets held in the B Trust which could be substantial.

Restate Your Trust?
With the federal estate tax exemption currently at $11.58 million per spouse it may make sense to restate your trust and remove the A-B provision. You will avoid the hassles a B Trust creates and give your heirs the potential for a second step up in basis. Be careful to check if your state assesses an estate tax in addition to the federal estate tax. A dozen states including Illinois have an estate tax with a lower threshold than the federal exemption of $11.58 million.

You should also review your trust if you have not looked at it lately for potential changes you may need to make to your list of successor trustees and beneficiaries. Please consult with your estate planning attorney for advice on your specific situation. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional.

What do Comet NEOWISE and saving for retirement have in common?

What do Comet NEOWISE and saving for retirement have in common?

What do Comet NEOWISE and saving for retirement have in common? They are both once-in-a-lifetime events! Watch this video to learn more from Aaron Kirsch, Managing Director of Spotlight’s Los Angeles office.

What do Comet NEOWISE and saving for retirement have in common?

What do Comet NEOWISE and saving for retirement have in common? They are both once-in-a-lifetime events! Watch this video to learn more from Aaron Kirsch, Managing Director of Spotlight’s Los Angeles office.

Spotlight on Investor Behavior: Fear

Spotlight on Investor Behavior: Fear

Why do we experience fear, and how does it affect our investment decisions? Watch this short video to learn about how our brains work and how this knowledge may make you a better investor.

Spotlight on Investor Behavior: Fear

Why do we experience fear, and how does it affect our investment decisions? Watch this short video to learn about how our brains work and how this knowledge may make you a better investor.

Spotlight on Investor Behavior: Herding

Spotlight on Investor Behavior: Herding

How does psychology and emotion influence our investment decisions? Learn about the human behavior known as herding and how understanding our human biases may help us become better investors.

Spotlight on Investor Behavior: Herding

How does psychology and emotion influence our investment decisions? Learn about the human behavior known as herding and how understanding our human biases may help us become better investors.

The Velocity of Money

The Velocity of Money

What is the velocity of money?

The velocity of money “is the number of times one dollar is spent to buy goods and services per unit of time.” (The Federal Reserve Bank of St. Louis). In a recession, the velocity of money typically slows down because consumers hold on to their money longer and spend less.

Over the past few weeks the velocity of money has hit a brick wall. I am not going out to my favorite restaurant for dinner. Because the restaurant owner has no customers, she is not going to buy a new car. Since she is not going to buy a new car the salesman at the car dealership will not receive a commission. You get the idea. In a recession, we stop spending money and the gears of our consumer-driven economy slow down.

Why I am (somewhat) optimistic

In past recessions, there was something structurally wrong with the economy. The Great Recession of 2008 was caused largely by the subprime mortgage crisis. There was something fundamentally wrong with the banking system that almost led to its collapse. The recession of 2001 was caused by the bursting of the dotcom bubble, the 9/11 attacks, and accounting scandals at major corporations. Except for the 9/11 attacks, there were again problems with our economic system.

The recession of 1990 was caused by Iraq invading Kuwait which caused oil prices to spike and manufacturing trade to decline. At the same time manufacturing was moving offshore and the North American Free Trade Agreement (NAFTA) began. Disruption in oil prices, trade, and manufacturing combined to create a recession. Recessions in the 1970s and 1980s were largely the result of oil supply disruptions and high inflation.

We are likely headed toward a recession or are currently in a recession. This recession is not actually caused by the novel coronavirus (fortunately millions of people are not dying). It is caused by the global response to COVID-19 which is shutting down activity to prevent the pandemic from getting worse. Other than the stock market being somewhat overvalued, there was nothing structurally wrong with the economy or the markets. Life as we know it shutting down has caused the velocity to hit a brick wall. Once this wall is torn down, we will hopefully witness a strong recovery.

Stay safe and healthy everyone.

The Velocity of Money

What is the velocity of money?

The velocity of money “is the number of times one dollar is spent to buy goods and services per unit of time.” (The Federal Reserve Bank of St. Louis). In a recession, the velocity of money typically slows down because consumers hold on to their money longer and spend less.

Over the past few weeks the velocity of money has hit a brick wall. I am not going out to my favorite restaurant for dinner. Because the restaurant owner has no customers, she is not going to buy a new car. Since she is not going to buy a new car the salesman at the car dealership will not receive a commission. You get the idea. In a recession, we stop spending money and the gears of our consumer-driven economy slow down.

Why I am (somewhat) optimistic

In past recessions, there was something structurally wrong with the economy. The Great Recession of 2008 was caused largely by the subprime mortgage crisis. There was something fundamentally wrong with the banking system that almost led to its collapse. The recession of 2001 was caused by the bursting of the dotcom bubble, the 9/11 attacks, and accounting scandals at major corporations. Except for the 9/11 attacks, there were again problems with our economic system.

The recession of 1990 was caused by Iraq invading Kuwait which caused oil prices to spike and manufacturing trade to decline. At the same time manufacturing was moving offshore and the North American Free Trade Agreement (NAFTA) began. Disruption in oil prices, trade, and manufacturing combined to create a recession. Recessions in the 1970s and 1980s were largely the result of oil supply disruptions and high inflation.

We are likely headed toward a recession or are currently in a recession. This recession is not actually caused by the novel coronavirus (fortunately millions of people are not dying). It is caused by the global response to COVID-19 which is shutting down activity to prevent the pandemic from getting worse. Other than the stock market being somewhat overvalued, there was nothing structurally wrong with the economy or the markets. Life as we know it shutting down has caused the velocity to hit a brick wall. Once this wall is torn down, we will hopefully witness a strong recovery.

Stay safe and healthy everyone.