Estate and inheritance taxes and revocable trusts in Florida

I’ve discussed elsewhere why I don’t think revocable trusts are a good vehicle for avoiding probate in Florida.

Why Revocable Living Trusts usually won’t avoid Probate in Florida

And, as I’ve noted, Florida does not have estate or inheritance taxes, at least none beyond the Federal estate tax.

Estate, Inheritance, and Income Taxes in Florida

Nonetheless; I do get people asking about living trusts, or revocable trusts and how they avoid estate taxes. I want to take just a bit of time to explain why revocable trusts have a reputation for saving money on estate taxes and why the tax advantages are largely irrelevant in today’s world.

Historically, the federal estate tax threshold was set fairly low; for most of the last part of the twentieth century the estate tax kicked in at a fairly modest level. From 1942 to 1976 the exemption was $60,000; in 1976 it went to $120,000 and slowly crept up to $600,000 by the year 2000. In 1976 sixty thousand dollars was a significant amount of money; in 2000 six hundred thousand dollars was a significant amount of money, but at no point could the federal estate tax exemption be considered a ‘fortune’ and there were a number of middle class households that might be subject to the estate tax.

Federal law on the estate tax has an unlimited exemption for any money left to a spouse; even if the amount left to a spouse far exceeds the estate tax exemption, no estate tax is due. So, historically, one strategy for avoiding the estate tax has been to leave everything, or at least everything that is valued more than the federal estate tax exemption amount, to the surviving spouse. In the short term, that makes sense. The problem is, sooner or later, everyone dies; including the surviving spouse. At that point the suriviving spouses estate becomes subject to the federal estate tax; and the only exemption available is whatever the federal exemption is for that year; in other words, the entire estate is taxable; whatever the surviving spouse owned on their own plus whatever they inherited from their deceased spouse.

This is the reason, or one of the reasons, lawyers developed the revocable living trust, specifically what is called an “A-B” marital trust. There are a number of variations on this, but in a nutshell, what an A-B trust does is effectively double the estate tax exemption. Instead of leaving everything outright to the surviving spouse, any amount up to the federal estate tax exemption goes into a trust for the surviving spouse; the surviving spouse has access to the money, but technically doesn’t own the money or the property; upon death of the surviving spouse the remaining funds in the trust pass to whoever the first spouse wants. And, of course, the surviving spouse retains full use of their own estate tax exemption. As I said, this allows the use of both spouses exemptions, which effectively doubles the the amount that can be sheltered from the federal government. At the time, it was a very good idea, and applicable to many middle class estates.

However starting in 2002, the federal estate tax exemption has been increased, quite rapidly; it went to one million dollars, and has been at $5 Million since 2011. In addition, since 2011, the federal estate tax exemption has become “portable”, meaning that under most circumstances, if the entire exemption amount is not used when the first spouse dies, the remaining exemption ‘carrys over’ to the surviving spouse and gets added to their exemption. This effectively doubles the exemption in most cases without the use of a trust.

Between the relatively large estate tax exemption of $5 Million and the portability of the estate tax exemption, few estates are subject to the federal estate tax. For most people, this is simply not an issue. If your estate may be subject to the Federal Estate Tax, you need to take some action and talk to a knowledgeable attorney about this, but few middle class families have an estate exceeding $5 million. And use of an A-B revocable living trust is pointless unless you are at risk of owing an estate tax.

Now, some states have estate taxes with much lower exemption amounts, but Florida does not have an estate tax or an inheritance tax. There may be reasons to have a revocable living trust in Florida, but for most people, avoiding the estate tax is simply not one of those reasons.

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