Posted On: July 11th 2018
The estate tax exemption is higher than it’s ever been, thanks to the Tax Cuts and Jobs Act (TCJA), which temporarily doubled the exemption to an inflation-adjusted $10 million ($20 million for married couples who design their estate plans properly). This year, the exemption amount is $11.18 million ($22.36 million for married couples).
If you’re married and you executed your estate planning documents years ago, when the exemption was substantially lower, review your plan to ensure that the increased exemption doesn’t trigger unintended results. It’s not unusual for older estate planning documents to include a “formula funding clause,” which splits assets between a credit shelter trust and the surviving spouse — either outright or in a marital trust.
Although the precise language may vary, a typical clause funds the credit shelter trust with “the greatest amount of property that may pass to others free of federal estate tax,” with the balance going to the surviving spouse or marital trust. Generally, credit shelter trusts are designed to preserve wealth for one’s children (from an existing or previous marriage), with limited benefits for the surviving spouse.
A formula clause works well when an estate is substantially larger than the exemption amount ― but, if that’s no longer the case, it can lead to undesirable results, including inadvertent disinheritance of one’s spouse. Suppose, for example, that Mike and Elaine, a married couple, each own $10 million in assets, and their estate plan contains a formula funding clause. If Mike died in 2017, when the estate tax exemption was $5.49 million, that amount would have gone into a credit shelter trust and the remaining $4.51 million would have gone to a marital trust for Elaine’s benefit. But if Mike dies in 2018, when the exemption has increased to $11.18 million, his entire estate will pass to the credit shelter trust, leaving nothing for the marital trust.