Congress Changed the Amount You Can Pass to Your Heirs Tax-Free: Should You Therefore Change Your Trust?

Posted on September 23, 2013

A news story today in the Wall Street Journal appeared entitled “How to Dismantle a Trust”.

It contained a cursory and misleading take on the effect of the changes Congress wrought when it raised the amount one could pass to heirs free of estate and gift tax to $5.25 million.  The comments section of the article is full of good, cautionary advice by many responders.  A representative responder opined as follows:

“the dollar amount exemption is only one reason to have a trust.

A trust is not a public document.

Real assets and real property transferred to trusts ARE NOT SUBJECT TO PROBATE

Trusts can include proper funding for children

Trusts can include provisions for guardianship, funding, and education for children.

Trusts can provide provisions for special needs family members.

Yes, those items can be set up as directives in a will, but if they are set up in and as a trust, they are set up already.

My wife and I have a trust. We absolutely are under and will remain under the $10 million dollar radar, and there is no way we would dismantle this trust thinking that it would be a good idea.”

A changing legal environment is always something one needs to take into account.  When deciding if one’s estate plan properly aligns one’s picture of the future that one would like to see come true with where things now stand in your family, your assets, your existing estate plan, and your wishes all need periodic review, especially if any of those components have materially changed, as is the case with the new estate tax ceiling.

An effective estate plan, one that actually works to make your vision about the future come true, is never a once-and-done exercise.  Like a car, it must be maintained or it will not take your dreams where you want them to go.

In the current legal environment, many estate plans were formed when the ceiling was much lower.  In light of that lower previous ceiling, many plans split into sub-trusts at the first death in a couple so that the estate tax exemption of the first spouse to die would not be lost or wasted at the second death.  With the higher ceiling, it now makes sense to think about the advisability of the trust not splitting at the first death.

What happens if the law changes again in the future?  I can almost guarantee that laws will change.  We are only a President and a Congress change away from the next change in the estate tax law.  What I cannot foresee is what that change will be.  What I can do is build flexibility into any changes in a trust so that the surviving spouse has the flexibility to meet whatever changes come without losing any of the tax advantages that the current law permits.

One great feature of the new law allows a surviving spouse to carry over the federal estate tax credit of the spouse who dies first without having to split the trust into sub-trusts.  This offers greats flexibility for the surviving spouse to make later changes.  The cost for achieving this flexibility is that the surviving spouse must make an election at the first spouse’s death by filing with the IRS.  The only current way to make this election is by filing an estate tax return, even if no estate tax is due.  The further benefit of not having to split the estate at the first death is that capital gains adjustment to the current fair market value can possibly reduce or eliminate potential capital gains tax at the second death, which was difficult to do previously.

I would encourage anyone with a previously established trust to have your situation looked at by a qualified legal professional.  It can potentially save you many times the cost of the legal work.

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