It may be time to deconstruct your estate plan

If you have any sort of sizeable estate and prepared your Will with an attorney’s assistance from business attorneys serving in Raleigh, over the past 10 to 15 years, there is a reasonable possibility, especially if you are or were married with children, that your Will contained some fairly complicated wording. If the expressions “credit shelter trust,” “family trust,” “A-B” Trust, or “disclaimer trust” ring a bell, the chances are that it might be time to reexamine your planning and decide how much structure you continue to need. You might decide, to coin a phrase, to “deconstruct” your estate plan to something simpler. You might even return to the older formula of wife to husband, husband to wife and, on death of both of them to the children.

The reason for reducing complexity is that, with the changes to the Federal Estate Tax, unless you are very wealthy, you might not need to divide your estate in this way. There may be other reasons for trusts but Federal Estate Tax planning might not be one of them. It would be best to consult with lawyers for estate planning in Fresno before formulating your will as they will help you in framing it to your preferences which also ensures that there would be no law issues to be filed due to dissatisfaction.

Formula (or Formulary) Clauses for Wills and Trusts were written to deal with federal estate and gift tax issues. They are more complicated than the simple wife to husband, husband to wife, on death of both of them to children Wills.

This is how a Formula Clause might read:

“I give to my spouse the minimum sum necessary to reduce my federal estate tax to the lowest amount possible and I give the residue to my credit shelter trust.”

Another version might state:

“I give to my credit shelter trust the amount of my unused exemption and I give the residue of my estate to my spouse.”

Other versions discuss “fractional shares.”

It might seem that this leaves the spouse with little after the death of the first spouse. However, the surviving spouse could be a Trustee of a credit shelter trust.

Before 2001 many relatively middle class estates fell into the category of needing federal estate tax planning. Without too much effort the combination of a house valued at say $350,000, life insurance for $300,000, and an IRA or 401(k) of $200,000 could begin to push the estate into federal estate planning for the excess. Because life insurance would be part of the estate for federal estate tax purposes, a mechanism known as an Irrevocable Life Insurance Trust (ILIT) came into existence to hold the life insurance and increase the value of the estate without itself being subject to tax.

Now, only very large estates are subject to the federal estate tax. For those dying in 2015, the unified credit, that is the amount that can be inherited without being subject to the federal estate and gift tax is $5,430,000. Surviving spouses have no federal estate tax regardless of the size of the estate since their is an unlimited marital deduction. Surviving spouses also can choose to pass on the unused credit of their deceased spouse to their children using what is referred to commonly as “portability.” The federal estate tax would apply to the amount that is above $10.86 million for those inheriting from the second to die spouse or above $5.43 million for those inheriting from an unmarried individual.

There might be other reasons for a more involved estate plan. For instance, it is possible the law might change again and make smaller estates subject to the federal estate tax although this is unlikely.

Also, a type of trust called a disclaimer trust has an optional component, that is, the surviving spouse inherits everything but can decide, after her or his spouse’s death, to lock away some of it in a disclaimer trust with herself as Trustee or Co-Trustee.

Since Q-Tip Trusts have some special uses regarding division of property between spouses by later marriages and children by an earlier marriage, there may be reason to keep a more complicated plan especially for second marriages but it still makes sense to take out the documents, look at them, and decide whether the complexity is necessary.

If all of this seems complicated, it is. However, the point is that maybe it is not necessary to work so hard to save federal estate taxes. That has already been taken care of for most of us. It does not, however, save Pennsylvania inheritance taxes. That is a story for another day.

For more, listen on Wednesdays at 4:30 pm to WCHE 1520, 50+ Planning Ahead, with Janet Colliton, Colliton Elder Law Associates, PC and Phil McFadden, Home Instead Senior Care.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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