It may be time for many married couples to update their estate plan. Particularly if you executed a revocable living trust with an A-B provision, also referred to as a Bypass trust, or a credit shelter trust.
The problem is that as recently as 2001 the applicable exclusion amount ( the amount that can pass to an heir estate tax free) was near $1 million dollars per spouse. Typically these bypass trusts were established so that no estate taxes would be due upon the death of the first spouse. They accomplished this by making use of the unlimited Marital Deduction which allows one to leave an estate of unlimited size to one's U.S. citizen Spouse ( non-citizens have to use special and burdensome devices known as Qualified Domestic Trusts- QDOTS)
EXAMPLE: Assume we have a happily married heterosexual couple, we will call them H & W for this example. Assume further that H has a separate property estate of $2.5 million and W has only modest sums. Further assume H dies first with the current annual exclusion amount.
Assume further that H & W had a credit shelter trust established when the applicable exclusion amount was far lower ( $1 million or lower). Assume further that the credit shelter trust did not provide for income and principal distributions to the surviving spouse because it was established solely for members of H's family ( those other than W). This is a common situation where there are children from different marriages involved.
What was contemplated when this plan was made was that given the same size of Estate ($2.5 million) and an applicable exclusion amount of $1 million ( what would have happened as recently as 2001) $1 million would have gone into the bypass trust for H's family, with the balance ( $1.5 million) going to fund the Marital deduction Trust which W could raid at will for her living expenses.
However, under the current rules and the above scenario no marital deduction trust would be created when the deceased spouse's estate was less than $3.5 million. So assuming H dies first, upon his death all of H's property would stay in the credit shelter ( aka bypass trust) and the marital deduction trust would never get funded. Now W would not have access to the income that she would have had when the applicable exclusion amount was lower.
So those with Estates greater than $1 million and less than 3.5 million may presently have a plan that will not accomplish the common goal of providing income and if need be principal to the surviving spouse. Indeed in the extreme example above W might soon end up penniless.
So what's the solution? Well for starters its time to see an Estate Planning Attorney in your area to amend your revocable living trust. Though technically called a modification in California, or a restatement, either way you are amending the terms of the trust. Most revocable living trusts are fully amendable while both spouses are alive and well and acting as trustees. With some relatively simple amendments, the problem can be avoided and the surviving spouse can be left with the certainty that he or she will have some means of support.
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