The Importance of Reviewing Your Trust

If you have taken the initial step of meeting with an attorney and have a trust in place, it is still important to review your trust periodically.  While it may be important just to make sure that your property will still go where you want it to go, or that the persons you have named to handle your affairs in the event you are not able to do so are still proper, sometimes changes in the law can be just as important.

Many trusts created prior to 2011 include planning that may not be necessary under current law, or be overly complicated in your situation. One such example would be the situation where the trust provides that upon the death of the grantor or spouse, the trust is to be split into two separate shares.  One share is to protect the federal estate tax exemption and another share is held for the benefit of the surviving spouse.  Sometimes these two shares may be referred to as a credit shelter trust and marital trust, respectively, or an A-B trust.  The credit shelter trust may also be referred to as the family trust share.

In this type of a scenario, the credit shelter trust is generally held in trust for the benefit of the surviving spouse.  The surviving spouse may have the right to receive both income and principal for their care during their life.  The remaining assets at the death of the surviving spouse will then pass to other beneficiaries.  If funded, the marital trust portion is also held for the benefit of the spouse.  Under the marital trust share, the surviving spouse will generally have greater access to principal, and may even have right to dispose of the assets.  The purpose of this arrangement was to protect the assets from the federal estate tax and to preserve the federal estate tax credit of the first spouse to die.  This was one of the few ways to preserve the federal estate tax credit prior to 2011.  Many trusts written prior to this time may include these types of provisions.  Often, the credit shelter was funded by a formula that would pass all of the assets needed to fully fund and protect the then-applicable estate tax exemption amount, meaning the surviving spouse may not have unrestricted access to any portion of the trust assets.  In fact, depending upon the specific funding formula, it could be that all of the assets are held in the credit shelter trust and the surviving spouse may not have any assets in the marital trust share.

In 2011, Congress passed new laws concerning the federal estate tax.  While the changes did much to eliminate the need for this type of planning by increasing the exemption amounts substantially (from $3.5 million to $5 million, indexed for inflation annually), it also adopted the concept of portability.  Portability provides that instead of having the credit shelter trust, with all the hassles of trust administration, the surviving spouse can file a simplified estate tax return and add the exemption amount of the first spouse to die to the exemption in effect at the second death.

A simplified example would be that a husband and wife with an estate of $8 million would pay no tax if portability were elected.  Say that the husband died in 2011 when the estate tax exemption amount was $5 million, and the estate tax return was filed showing all of the assets passed to the wife.  Then, in 2017, the wife dies when the estate tax exemption amount is $5.45 million and the total assets are now worth $8,450,000.  If the wife had not elected portability, then her estate would owe a federal estate tax on $3 million worth of assets at approximately a 40% tax rate.  However, because a portability election was made, her exemption amount at death was $10.45 million and no estate tax was due.

If you have a trust that was written prior to 2011, and it talks about splitting into two shares upon the death of the grantor (if they are survived by a spouse), then it may make sense to review your trust with an experienced estate planning attorney.  Cripps & Simmons would be happy to help you review your plan and make sure that it is still appropriate for your needs.  Feel free to call the office to schedule a review appointment.