Simplifying Estate Planning

     Our last two posts discussed the increase in the applicable exclusion to $5,250,000, which vastly reduces the number of estates with potential estate tax liability, but makes for the possibility of problems for surviving beneficiaries if older estate plans are not updated. At the same time, under the other circumstances, the new estate law allows couples to simplify their estate plan significantly. 

     A common practice, because of lower applicable exclusion amounts in prior years, involved each spouse having a Living Trust and splitting the couple’s assets between the two Trusts. Using this strategy, each spouse’s Trust protected the applicable exclusion amounts at their death and there was only potential tax liability on the second death if the estate exceeded twice the applicable exclusion amount. 

     With the permanent applicable exclusion at $5,250,000 increased annually by the cost of living, couples who expect they will always have less than that amount may decide to simplify their planning by changing to one Joint Trust, where both parties control all the assets during their lifetime and the survivor of them controls all the assets until their death. This simplification is effective where both parties trust each other and where both spouses agree on the final takers under the trust. In these circumstances, the couple only requires one trust and all assets can be funded to that trust to minimize documentation, investment statements, and administration. 

     We would be remiss if we did not remind readers that even if the non-marital trust is not needed for estate tax purposes, the non-marital trust has significant benefits. If the typical marital/non-marital share is kept in place, the surviving spouse’s creditors cannot reach the principal of the non-marital share because it is irrevocable and the spouse cannot change or control the principal. The spouse can use the trustee and the trust terms as a shield against a possible new spouse, while still being able to use the trust income, preserving the principal for children and other loved ones. Additionally, if children are prone to asking for money, the non-marital trust allows the surviving spouse to say “no” due to their limited access. The trustee can also protect from children badgering mom or dad for money prior to the death of the second spouse. 

     Even without a tax concern, the non-tax reasons for maintaining two trusts continue to factor into the planning discussion. A client’s goals and concerns regarding asset protection, divorce and remarriage protection and protecting children remain important. Before making any changes it is important to discuss all aspects of a client’s situation and collaborate with the client’s other financial professionals to avoid costly errors.

Alan Ferrara