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Is Your Estate Plan and Your Family Trust Obsolete?


There is urgency for you to understand that your family trust is now likely unnecessary. Neglecting to review your trust documents will almost certainly mean that your heirs will have to take tedious and expensive action in the future to deal with your potentially obsolete family trust.

Attached is an overview of recent changes regarding family trusts and disclaimer plans which I encourage you to review. 

I would invite anybody with a family trust to contact me or other members of our Personal Wealth Services practice. We will evaluate the need for preparing an updated document or documents based on the disclaimer plan. Please take a moment to review your estate planning documents now. We look forward to being of service to you in any way we can.     

— Steve Smith

Your Trust Strategies and the Current Federal Estate Tax Law:  Your plan is probably a problem.

The Good.
Federal legislation enacted early in 2013 kept the $5 plus million per person estate tax exemption and the concept of portability of the estate tax exemption. For those of you who are not aware, portability simply allows the surviving spouse (if the proper simple elections are made on a timely filed 706 [federal estate tax return]) to use any of the $5 plus million exemption of the first spouse to die that was not used. This means that, if the proper simple elections are made, a married couple can shelter $10 million plus (actually close to $11 million now) in assets from federal estate tax as the assets pass on to their children or other beneficiaries. This should eliminate the application of the federal estate tax to most people and eliminate the need for the family trust for most of us. I keep saying “$5 million plus” because the $5 million exemption amount is indexed for inflation and is already in excess of $5 million and presumably will continue to go up over the years.

The Bad.
However, if you have a formula provision which leaves the $5 plus million exemption amount into a family trust like many people, thanks to Congress this can result in $5 plus million unnecessarily going into a family trust. What this means is that your heirs will need to hire an attorney to deal with your now likely unnecessary family trust if you do not deal with it.

The Ugly.
Unfortunately, if you have one of these formula provisions this creates a problem. Given the changes in the federal estate tax law, I am now using a format under which everything is left to the surviving spouse on the first spouse’s death with the surviving spouse having the right to disclaim if the estate tax law should change in a less favorable manner. By something less favorable I mean if the exemption amount should be reduced below $5 million plus or portability should be eliminated. In such a case, the surviving spouse could exercise a disclaimer in favor of a family trust under a Revocable Trust Agreement. Such an approach at least gives the surviving spouse a right to look at the state of the estate tax law at the time of the first spouse’s death and make a decision as to whether to disclaim or not based on professional advice.

I assume that many of you consider this bad news since it likely will necessitate redoing your estate planning documents. However, we have learned something regarding not trusting Congress and once you go to a disclaimer plan there should be no further changes to your estate plan created by the estate tax law regardless of future changes in the tax law.

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