March 28, 2007
What if you don’t know if you’ll want to fund the bypass trust?
A recent post discussed the problem created by estate plans that aren’t updated to take advantange of recent changes in tax laws – or were never drafted with actual human beings in mind, just the tax code.
Specifically, it’s pretty common for a living trust for a married couple to mandate that the trust property be split into two different trusts upon the death of the first spouse. This is done partly to protect the estate from estate tax, and partly to make sure that some of the property will be distributed according to the wishes of the spouse who passed away.
This sort of planning is important if there’s enough property to worry seriously about estate tax; or if there’s a significant chance that the surviving spouse will frustrate the original estate plan.
On the other hand, there are a lot of families where there’s no serious risk of estate tax, and where the second spouse either wants or needs the flexibility to use/control all of the property .. or where the second spouse reasonably wants or needs to change the original distribution plan. (For example, if there are two or three children, and one of them quits their job or moves cross-country to care for the ailing surviving spouse, it’s not uncommon to see a disproportionate distribution of property to that child who made a big sacrifice to provide care and support for the parent.)
A well-drafted estate plan can include flexibility to allow the surviving spouse to allocate property between the A and B trusts after the first death. This isn’t necessarily what you’ll get from a trust mill, or from an attorney who isn’t interested enough to spend a few hours talking to you to understand your situation – but it is certainly possible. Two common approaches are called a “disclaimer trust” and a “Clayton election”.
I think this sort of planning is very important where, as now, it’s tough to know what the estate tax exemption amounts are going to be, and what the family is going to look like, upon the first (and second) deaths.
Gerald L. Kane said,
January 27, 2009 at 10:27 pm
Greg,
I completely agree. In recent years, with the exemption amount increasing, fewer and fewer clients have been needing the mandatory A/B split. The vast majority of our estate plans have been disclaimer or clayton election type plans.
However, even when the mandatory split is not needed for tax reasons, many clients have opted for a mandatory split to provide for asset protection for the surviving spouse or where the deceased spouse wants to control their half of the estate from below ground to ensure their assets get to their chosen loved ones — this is common in estates where spouses have children from prior marriages.
-Gerald Kane