If you do not already have a living trust in place, you know that you should. A fully-funded trust avoids probate, saves money, and keeps your family out of the court system. A living trust is the cornerstone of your estate planning.
You should also review your living trust at least every couple of years. This is particularly true in light of the new Tax Act which makes the need even more apparent.
The Economic Growth and Tax Relief Reconciliation Act of 2001 dramatically changed the rules on estate tax, gift tax, and capital gains tax. With regard to estate taxes, it substantially increases the number of dollars that you can pass along upon death without exposure to estate tax. For an individual dying in 2006, $2 million can be passed along to one's children or grandchildren without estate tax. The level of protection increases to $3.5 million in the year 2009.
It is in the year 2010 that the estate tax is completely repealed. This means that there is a special tax break for those who die in the year 2010 - even if you have $100 million, there is no tax whatsoever.
Amazingly, this tax legislation expired as of January 1, 2011. This means that the level of individual protection drops to $1 million for individuals dying in the year 2011. This also means that Congress will revisit these tax laws and undoubtedly make significant changes. We do not know what the future actually holds.
With regard to your trust and your tax planning, it means that you need to sit down with an attorney and review the impact of this legislation on your family and your trust. It may make sense to make no changes, or it may make sense to modify your trust. Above all, you must develop an understanding of what these changes mean for you and your family.
You should also review your trust with two specific points in mind, both of which are independent of tax planning. First, have you chosen the correct person as your successor trustee? Your successor trustee is the person who takes over for you if you become ill. This person will manage your assets, pay your bills, and have complete control of your assets. This person must be highly responsible and completely loyal to you. This also means that you should not choose your favorite child just because you love him/her the most. You must be a bit dispassionate and pick the child or other individual who will take the job seriously and do an excellent job on your behalf.
Secondly, is your bequest plan still in tune with your goals and objectives? If you have a child who is disabled, a spendthrift, or a hopeless dreamer, it may not be appropriate to simply distribute a significant portion of your estate to that child. You may want to have all or some of that child's share held in trust for his/her own protection.
Your living trust can be amended at any time. You should take advantage of this as you look at your evolving world, changes in tax law, and developments within your own family.
You Can Change the Survivor's Trust
If your wife or husband is deceased, and if we prepared your original trust, your trust was divided into two subtrusts at the time of the first death. These are known as the "Exemption Trust" and the "Survivor's Trust."
Assets in the Exemption Trust are forever protected from estate tax exposure. Terms of the Exemption Trust are irrevocable. This means that they cannot be changed by you or anyone else.
The Survivor's Trust, however, is completely under your control. You can do with it as you please. You can spend all of it, give it away, or change the terms of the trust. What changes might you make?
You might decide that you would rather have a different person named as your "Successor Trustee." This is the person who takes over management of your trust in the event of your incapacity or after your death. If this is the only change you make in your trust, there will be no legal fees since this is the trust amendment covered by terms of your POM agreement.
You can also change the bequest plan in the Survivor's Trust. You can delete all of the named beneficiaries and replace them with another set of beneficiaries. You can adjust the percentages. You can have a portion of your money go into a sub-trust for the benefit of a disabled relative or for a grandchild.
Caveat: If assets in your Survivor's Trust exceed the then current exemption amount, we remind you that there could be estate tax exposure at the time of your death. We can typically eliminate this tax problem with careful planning. This is an issue you should bring to our attention so that we can present planning options to you.
Note: This article provides information, it does not constitute legal advice.
Gilfix & La Poll Associates LLP attorneys practice elder law and estate planning and are available to answer any questions about Trusts, Durable Powers of Attorney for asset management, Advance Health Care Directives, and any other appropriate planning options.