By Steven J. Gibbs, Esq.
Affluent estates often require special planning goals like long-term preservation of family heirloom assets, deterrence of squandering, and – of course – reduction of estate-tax liability. Under current (2019) rules, only estates valued at $11.4 million or more qualify for federal estate taxes. But for those that qualify, the rates go as high as 40%. Thirteen states and Washington, D.C., add estate taxes at the state level. Florida, however, is not among them – just one of the reasons Florida is a great jurisdiction to plan a high-net-worth estate.
Not only does Florida’s state government not impose any income, estate, inheritance, or gift taxes, but state law also recognizes most forms of joint ownership (e.g., POD and TOD designations, joint tenancy, tenancy by the entireties) that allow assets to pass outside of probate with minimal transaction costs. Even more, Florida’s version of the Rule Against Perpetuities permits dynasty trusts to endure for over 300 years, or all but indefinitely. All told, Florida’s estate-friendly legal climate affords planners an impressive assortment of Florida wealth-transfer options to choose from.
Most high-net-worth estate plans in Florida rely on some combination of strategic gifts, trusts, and wills. In practice, the three frequently work symbiotically. For instance, gifts might be used to fund a trust in Florida. Or, a last will & testament in Florida might create one or more testamentary trusts. A testamentary trust in Florida is a trust declared in a will and funded using assets that pass through probate, allowing the testator to leave instructions for use of assets after death, while retaining control during life. A living trust, on the other hand, is a revocable inter vivos (“during life”) trust in Florida that can accomplish many of the same objectives as a will, but without the need for probate.
Living trusts are sometimes touted as a will replacement to be used instead of a separate will. While this is occasionally possible, it is often a false choice. Many estates, especially high-net-worth estates, are best served with a will in place, even if it’s just a pour-over will acting as a safeguard in case any assets aren’t otherwise accounted for.
A-B Trusts (a/k/a Bypass Trust) in Florida
When a married couple is planning an estate, the strategy typically involves putting the estate assets into different “buckets” for estate tax planning purposes. This is the idea behind A-B trusts, for spouses to reduce or eliminate estate taxes by taking full advantage of the unlimited spousal exemption and both spouses’ lifetime exemptions. When one spouse dies, the tax code allows him or her, through the unlimited spousal exemption, to transfer all wealth to the surviving spouse with no estate tax liability. The problem, historically, was that, when the second spouse died, the estate would be taxed on all wealth exceeding the second spouse’s exemption. So, the first spouse’s exemption was essentially wasted. Enter the A-B trust.
An A-B trust is actually two complementary trusts created through a will or living trust. Upon the death of the first spouse (“Husband”), the A Trust (or “marital trust”) is funded with all assets exceeding the value of Husband’s exemption. The A Trust is exempt from estate taxes under the spousal exemption because the surviving spouse (“Wife”) is the beneficiary. At the same time, the B Trust (or “bypass trust”) is funded up to the amount of Husband’s exemption. B Trust can be used to support Wife, but Wife cannot have any ownership interest or control over the assets. Upon Wife’s death, the wealth in both trusts passes to other designated beneficiaries. The value of assets in the A Trust is subject to estate taxes after applying Wife’s exemption, but the B Trust is not included within Wife’s estate.
The utility of A-B trusts was limited by a 2011 amendment to the tax code that made estate tax exemptions “portable” between spouses. Under the new portability, a surviving spouse can claim the amount of any estate tax exemption not used by a decedent spouse by simply filing a form with the IRS. Then, upon the surviving spouse’s death, the effective exemption amount will be the survivor’s exemption, plus the unused portion of the first spouse’s exemption.
At first glance, this would seem to make A-B trusts irrelevant, particularly when combined with the recent dramatic increase in the estate tax exemption. However, some estate-planning attorneys have noted that, although taking full advantage of both spouses’ federal exemptions is the primary benefit of A-B trusts, it is not the only benefit. Of the states that have imposed estate taxes, only two (Hawaii and Maryland) had adopted exemption portability. And all of those states have substantially lower exemption amounts compared to the IRS.
For residents of Florida, where there is no state “death tax,” that’s less of a concern – unless a surviving spouse might move to a state with the tax. However, there are other situations in which an A-B Trust, or something similar, could still be useful. Perhaps most notably, an A-B trust can be used to ensure that a surviving spouse is fully provided for during life, but that the appropriate heirs ultimately inherit the estate in the appropriate amounts. That is, an A-B trust protects against, for example, a surviving spouse’s disinheriting the decedent spouse’s children from a prior marriage; or against attachment by the surviving spouse’s creditors; or against wasteful spending by the surviving spouse.
Further, while the gift and estate tax exemption is now portable, the GST exemption is not. So, if, for instance, a couple wants to leave substantial wealth to grandchildren – perhaps to avoid squandering by the intervening generation – an A-B trust may be necessary to gain maximum benefit of the GST exemption.
And, finally, there’s the question of appreciating assets and inflation adjustment. An exemption transferred through portability is not indexed for inflation, and, if the surviving spouse outlives the decedent by an extended period, estate assets could appreciate substantially. If the decedent spouse’s exemption is applied at the time of death to assets held in a bypass trust, the wealth held in the trust will eventually transfer to the next generation free of estate tax regardless of how dramatically the value increases. But an exemption transferred through a portability claim might not be sufficient to cover the same assets by the time the surviving spouse dies.
On the other hand, appreciating investments receive a step-up in basis for estate planning purposes in Florida and elsewhere every time they pass through an estate. So, using portability to pass equities through the estates of both spouses could result in big income tax savings.
What it ultimately boils down to is that, although A-B trusts are not as widely relevant as they once were, under the right circumstances, they can still be a highly valuable estate-planning tool. An experienced estate-planning attorney can help you decide if an A-B trust is a good approach to take based on your financial situation and goals – and help craft an overall estate plan tailored to your priorities.
Steven J. Gibbs is a trust and estate planning attorney who provides complete Estate Planning, Trust Planning, Business Planning, Asset Protection, Elder and Medicaid Planning, Real Estate, Probate and Trust Administration legal services in Florida and California. Steve’s main offices are located in Fort Myers, Florida, and San Juan Capistrano, California. Estate planning legal services are provided statewide in these locations.
The Gibbs Law Office was founded by Steven Gibbs in January 2009 upon the commitment to provide client-centered legal services.
Steven Gibbs founded the Gibbs Law Office in January 2009, committed to providing client-centered legal services.
Steve as he would rather be called, is not your typical attorney. If you appreciate the staunch egotistical mannerism of most firms, you will be delighted with Steve’s unpretentious approach to educating and then assisting his client. Instead of giving you his complacent and lofty ideas, he would rather pursue your expectations with professional conversation about resolving your concerns under the Law. It’s your life and it’s his job to make your legal expectations come true while using years of his guidance and knowledge.
Steve was admitted to the Minnesota Bar in 1999, the Florida Bar in 2007 and was admitted to the California State Bar in 2014.
Along his career path, he was an associate attorney for an insurance defense law firm; an in-house real estate negotiator for Target Corporation; and corporate counsel for Civix, LLC and Vice President for North American Properties where he was responsible for various real estate transactions, including legal issues and negotiating unresolved business issues. Prior to opening Gibbs Law Office, PLLC, he was an associate with the firm of Roberts & Engvalson, P.A. where he gained his knowledge of trusts, estate planing and Wills. He opened his own firm in 2008 and now focuses on laws that will enrich the needs of his clients throughout their lives and those of their children. The firm has developed a practice dealing only with Trusts and Estate Planning, Wills, Medicaid Planning, Elder Law, Real Estate, Business Law and Probate.
Quoting from Steve “I decided to practice in areas that families will need as they progress down life’s path. To help them with a solid foundation that will carry them throughout there lives is a rewarding experience for me and my staff.”
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