Many New Jersey residents have taken proactive stances toward their estate planning needs and have had their documents in order for many years. This is admirable, especially considering the number of people who fail to address asset protection needs — many of whom die without having any plan in place. However, simply completing the estate planning process is not enough to ensure that the highest level of protection is in effect. In some cases, estate planning tools become obsolete over time.
An example is found in a type of estate planning structure known as an A/B plan. In such an approach, an individual states that a portion of all assets will go into a trust for one individual, usually a spouse. The rest of accumulated assets will go into a second trust from which all taxes on the estate will be paid. Anything that remains from the second trust will pass to other heirs, such as children. This approach was popular in previous decades and was chosen to preserve the estate tax exemption of the first spouse, which otherwise would be lost if not called into effect at the time of death.
In 2013, changes to existing estate tax law made this approach obsolete. Now, spouses can elect to leave all of their wealth to their partners, and the deceased spouse’s estate tax exemption will also transfer to the surviving spouse. This is known as “portability,” and it gives spouses a combined $10.86 million to pass on without triggering the federal estate tax.
Since this change, A/B plans are less appealing to many in New Jersey. They no longer have any benefit when it comes to avoiding the estate tax, and, in fact, they can lead to additional income tax on the part of the surviving spouse. While some individuals may still benefit from the creation of a bypass trust, each scenario is different. For those who have not reviewed their asset protection strategies since the new laws went into effect, it may be time to have an estate planning attorney review the existing documents and offer alternative strategies.
Source: news.morningstar.com, “Is Your Estate Plan Obsolete?”, Deborah L. Jacobs, May 5, 2015