Estate Planning

Has Your Estate Plan Outgrown You?

If you’re married, you and your spouse have estate planning documents that were prepared before 2009, and the current and projected lifetime value of your estate is less than $5.5 million, or potentially $11 million, your plan may be outdated.

If you’re married, you and your spouse have estate planning documents that were prepared before 2009, and the current and projected lifetime value of your estate is less than $5.5 million, or potentially $11 million, your plan may be outdated.


A brief history of the evolution of the estate tax and the estate tax exemption will help you decide if it’s time to consult with your estate planning attorney.

Beginning in 1916, an estate tax was enacted that subjected the net value of an individual’s estate to an estate tax upon death. The net estate value, which includes life insurance proceeds and taxable lifetime gifts, has always been reduced by an exemption amount that’s used to calculate the amount of one’s estate tax liability. It was originally $50,000, fluctuated between $40,000 and $100,000 until 1977, and increased to $600,000 in 1987, $675,000 in 2001, and $1 million in 2002.

The growth of the estate tax exemption accelerated over the next eight years, jumping to $1.5 million in 2004, $2 million in 2006, and $3.5 million in 2009 before landing at $5 million in 2010. With the addition of inflation increases beginning in 2012, the current exemption is $5.43 million.

Estate Tax Reduction Strategies

If you’re married and you and your spouse have “I love you” wills where each of you leaves 100% of your assets to each other upon your death, there’s no estate tax liability when the first spouse dies. This is true regardless of the size of your estate as a result of an unlimited lifetime and estate marital deduction for transfers of assets between spouses.

The estate tax exemption is irrelevant for spouses with “I love you” wills when the first spouse dies – with one important exception. If the value of the survivor’s gross estate exceeds his/her estate tax exemption when he/she dies, his/her estate tax liability can be reduced to the extent that a particular advanced estate planning strategy is part of the couple’s estate plan.

It was common practice for many years for estate planning attorneys to include a provision in a client’s will or living trust that would shelter a portion, or potentially all, of a couple’s estate from estate taxes where the value of the combined estate exceeded the applicable estate tax exemption amount. This could be accomplished through the use of what’s alternatively referred to as an “exemption trust,” “bypass trust,” “credit shelter trust,” or “B trust” provision.

In lieu of simply leaving 100% of your estate to your spouse when you die, a bypass trust provision carves out the value of the first-to-die’s portion of a couple’s estate up to the amount of the estate tax exemption at the time of death. The assets that comprise the calculated value are used to fund a trust that’s separate from, and bypasses, the surviving spouse’s estate. The value of the trust plus any growth in the value of trust assets between the deaths of each spouse is excluded from the value of the surviving spouse’s estate provided that the trust is properly funded and maintained.

Potential Bypass Trust Obsolescence

The use of a bypass trust can result in substantial estate tax savings in situations where the value of the surviving spouse’s estate plus the value of the bypass trust exceeds the estate tax exemption amount at the time of death. The bypass trust must be established as a separate legal entity and maintained in accordance with the terms of the trust. This includes making timely and accurate income distributions from the trust to trust beneficiaries and filing of required annual fiduciary income tax returns.

With the recent escalation of the estate tax exemption from $1 million in 2002 to $5.43 million today, many bypass trust provisions have become unnecessary. This is the case where the current and projected value of a couple’s net estate during their lifetime isn’t expected to exceed the current exemption amount.

Furthermore, beginning in 2013, with the introduction of “portability” rules, unused estate tax exemptions can be transferred to surviving spouses to increase the amount of the surviving spouse’s estate exemption without the use of a bypass trust. This change enables a couple to escape tax on the value of assets equal to double the estate tax exemption, or just under $11 million, provided that an estate tax return with appropriate portability election wording is filed in a timely manner after the death of the first spouse.

Consult With an Experienced Estate Planning Attorney

It’s important to keep in mind that the use of a bypass trust provision may still be appropriate for second marriages where you want to carve out assets for children and/or the use of the “portability” provision is unavailable. Estate planning is complicated with lots of potential traps for the unwary. Consultation with an experienced estate planning attorney is highly advisable before making any changes to existing estate planning documents.

By Robert Klein

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.