ESTATE PLANNING FOR THE REST OF US:AMENDING YOUR TRUST FOR SIMPLICITY AND FLEXIBILITY

By M. Todd Smith, Esq.
©2013

As an attorney, a typical client reaction after reviewing my initial draft of a properly customized revocable trust is one of confusion and even a little resentment. “Why does there have to be so many pages of legalese?” They understand that they hired me to do this job because I speak the language and I understand that they just want to comprehend what it is I have prepared for them to sign.
For many years, the reasons for the additional complexity in drafting a revocable trust for clients of average wealth included the need to minimize the estate’s exposure to the estate tax. But that necessity has gone away for many clients as the federal estate tax exemption has gradually increased over the last few years to over $5 million (over $10 million for married couples), permanently indexed to increase still further with inflation.
Now when I meet with clients with a net worth of under $2 million or so, I always review their existing revocable trust and have to explain to them that their trust is more complex than they need. For example, most married couples have what is called an “AB Trust” in the current estate planning lexicon. Such a trust requires a division of all trust assets upon the death of the first spouse into an “A Trust” for the survivor’s share, and a “B Trust” for the decedent’s share. One purpose of such a trust was to ensure that the federal estate tax exemption was used for each spouse, effectively doubling the exemption for most married couples.
The knee-jerk reaction to the increased federal estate tax exemption for those clients would be to terminate the trust. But there is a better way. It is very short sighted in many cases for a client to completely abandon the “AB” concept solely on account of the fact that the estate tax is no longer a major concern. For instance, there are still benefits for a surviving spouse to have the decedent’s share of the assets held in a B Trust that are not related to the estate tax. If properly established, a surviving spouse’s creditors will run into a wall trying to get at the assets in the B Trust. Also, if the decedent spouse had children from a prior relationship, it might be important to go to the grave knowing that the B Trust is irrevocable and whatever is left when the survivor dies must go to the kids.
One popular concept that takes into consideration the currently high estate tax exemption is sometimes called a “Disclaimer Trust” or more appropriately a “Discretionary AB Trust.” This potentially could give clients the best of both worlds: the survivor has the flexibility to opt out of the division into two trusts when the first spouse dies if the estate tax is not a concern at the time and the administrative burden of splitting the trust outweighs any non-estate tax related benefits, while keeping the ability to opt into the division if the survivor feels the benefits are significant.
It is important to always keep in mind that as long as both spouses are still alive, amending a revocable trust is not only possible, but can be very simple. The best method for proceeding for all clients, regardless of net worth, is to have your revocable trust reviewed every few years to make sure that it is appropriate for your current circumstances, taking into consideration the current laws. If it has been a few years since you last updated your Trust, or if you have a Trust that you don’t understand, contact our office and we can help explain what you currently have in place and can also make recommendations if an update is necessary.

About Todd Smith

Attorney Todd Smith works as the Senior Attorney in the Trust Administration Department. If you have been named as a Trustee or Personal Representative in an Estate, contact Mr. Smith so that he can ensure that you are meeting all of your responsibilities and fiduciary duties. Mr. Smith is also proficient in our Entity Formation in Arizona Department. Whether it be Business Succession Planning or an Arizona Limited Liability Company, Mr. Smith has the experience and expertise. If you have a loved one that has passed away and need assistance with a Trust Administration in Scottsdale, Arizona or a Probate in Scottsdale, Arizona contact 480-515-3716 to schedule a free initial consultation with Attorney Todd Smith. Google+ Profile
This entry was posted in Estate Planning, Tax. Bookmark the permalink.