Estate Tax Changes Mean You Need a Living Trust Update

by Neal Frankle, CFP ®

Recent estate tax changes indicate you may need to have your trust reviewed now. As you probably know, the estate tax in 2010 is 0%. That means if you die this year, you won’t have any estate tax to pay regardless of how wealthy you are. Believe it or not, this estate tax change could easily ruin your estate plan.

Let me explain the problem.

Most every trust out there has language in it to provide certain beneficiaries (usually the kids) with the greatest amount possible that does not trigger estate tax.

Let’s look at an example.

Assume you wrote your trust in 2001, during which time you could have left $675,000 to someone without triggering an estate tax. Any amount above that figure would be taxed at 55%, so lawyers drafted wills to reflect that. The trusts often said, “Leave $675,000 to (fill in the blanks) and the balance to my spouse.” This was so because you could leave any amount to a spouse without triggering estate tax.

From 2001 through 2009 that $675,000 exclusion figure went up. As a result, lawyers shifted the wording of the trusts. They usually provided for the non-spouse beneficiary to receive any and all amounts up to the exclusion in place at the time of death. So, if you died in 2009 when the exclusion was $3.5 million, you could leave $3.5 million to the kids and any amount above that to your spouse without triggering any estate tax. With me so far? Can you see the problem?

Most trusts still have that language. That means if you die when the estate tax is 0% (2010 and possibly beyond) with this language in the trust, everything will go to the non-spouse beneficiaries. This is probably not what you had in mind – and certainly, I can guarantee, it’s not what your spouse has in mind.

How to fix this problem?

It’s simple really. All you have to do is have your attorney add language that still provides for a the largest amount possible to the non-spouse beneficiaries that doesn’t create federal estate tax but specify a maximum amount. This way, the kids will be taken care of and so will the spouse. The only one left holding the bag will be Uncle Sam.

This is a simple problem to fix yet a very expensive disaster if ignored. Has your attorney contacted you to update your trust?

Since nobody knows when you are going to die – not even your attorney – you’d think that the lawyers would be aggressively telling their clients about this problem.

Does your trust have a provision to cap the amount going to the non-spouse? If not, has your attorney contacted you? Because of these tax law changes, are you less concerned about how to pay for estate tax?

Just in case, here’s more info on 2010 estate tax rules.



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