When one spouse dies, a surviving spouse suffers greatly from grief, sadness, feeling of loss and emptiness. However, there are no immediate difficulties in a day-to-day life when it comes to dealing with banks, mortgage companies, maintaining houses and paying bills. Generally the husband and wife are both on the bank account, as joint account holders or co-trustees. The surviving spouse is able to sign the check, deposit or withdraw the funds to do whatever they wish to do. So, it will appear that nothing needs to be done.
NOT so if you want to maintain the effectiveness of your trust. If you have created a trust when the estate taxes were at a 55% for any amount over a small exemption amount such as $600,000 all during 1990s. Your trust will most likely have A-B or A-B-C provision requiring (a wording of “shall”) a division of assets to survivor trust (A), tax credit/by-pass trust (B) and/or disclaimer/marital deduction trust (C) in order to minimize the eventual estate tax upon the death of the surviving spouse. These types of trust are very inflexible to manage for the surviving spouse of a modest estate with assets not exceeding $5 million today.
In order for the trust to be legally effective, the surviving spouse MUST appraise the assets, identify and allocate assets belonging to the deceased spouse into the tax credit/by-pass trust, and file an Estate Tax return (IRS Form 706). This trust is irrevocable and the surviving spouse cannot change the terms and conditions of the trust. If the required A-B or A-B-C provisions are not executed, the entire trust is deemed irrevocable rendering the surviving spouse to live with the old, ineffective and inflexible terms created when the estate tax laws were much different than today.
Are Taxes Effected?
Any Trust created before the 2010 New Estate and Gift Tax Legislation MAY NEED a review, amendment and/or restatement to take advantage of the flexibility of the new law called “Portability”. On December 17, 2010 Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (HR 4853). This legislation dramatically changed the laws that would have come into effect on January 1, 2011 on Federal Estate and Gift Tax. These taxes are imposed to tax the transfer of wealth from one generation to the next. Many people wish to avoid this type of transfer tax.
As of December 2010, both the Estate Tax and the Gift Tax Exemptions increased, however, they became tied together so that every individual may transfer the exempt amount (now around $5.430M) during his or her life or at death. Transfers exceeding $5.430M will be taxed at a rate of 40% today. The new law also provides for “portability.” Portability allows a surviving spouse to preserve a deceased spouse’s unused estate tax exemption by filing a federal estate tax return. This preservation ensures that the couple may ultimately transfer a combined $10M before paying any transfer/estate tax. In a household with modest assets, that created a trust prior to 2010 should have it reviewed to look for this very outdated provision which can be inflexible and have harsh requirements for the surviving spouse.
Does my existing trust need to be reviewed by an estate planning attorney?
You have made a very wise decision when you protected your family from Probate by investing in a Living Trust. However, your Living Trust is not a once in a lifetime, “do it now, and forget about it” experience. Changes in your personal circumstances may require “updating” your trust in order to avoid unnecessary and inconvenient burdens and expenses for your family. If it has been more than three years since you last taken a look at your living trust, ask yourself the following questions:
Is your Trust over 5-7 years old?
Has there been a change in your family situation? Birth, death, divorce, or marriage?
Do you have a Married Couple’s Trust and your spouse has passed away?
Do you wish to change the names and/or order of your trustees or agents?
Do you wish to change the disposition of your estate?
Did you purchase or refinance Real Estate since your trust was established?
Are you in need of long-term care and seek Medi-Cal options?
If you have answered yes to any of these questions, Elder Law Services of California can be of service and aid in another changing or updating of your existing trust or will. Most trusts created by estate planning attorneys do not include clauses for Medi-Cal Planning. Take advantage of our free consultation, and have an elder law attorney review your trust or will.