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Many couples created Revocable “Living” Trusts before the 2001 changes in the tax law which increased the personal estate tax exemption over what it was in earlier years.  Just before the new law, the personal lifetime exemption was $675,000.  For persons dying in years 2006 through 2008, the exemption has been increased to $2,000,000 and the amount of this exemption is scheduled to increase further.

Many of these older trusts contain directions to split the trust estate into mandatory sub-trusts upon the death of the first spouse.  This mandatory split was usually designed to preserve each spouse’s personal exemption and thereby reduce or eliminate estate taxes over the span of two deaths. However, these trust provisions directing the creation and funding of sub-trusts often still assume the existence of the older, lower exemption amount.  In the current climate, these trust provisions may now no longer be necessary and may undermine the couple’s goal to leave to the surviving spouse full access to the couple’s entire estate and/or may now only be appropriate to much larger estates.  These splits may now leave the surviving spouse with only restricted access to one-half of the couples’ resources without a corresponding tax benefit.
In smaller to medium sized estates, where such tax–driven splits may now be unnecessary, unanticipated problems can arise. For example, if the survivor’s access to the assets in the sub-trust will usually be restricted so that he or she can only access the income generated from the assets, absent special circumstances; the allocation of the personal residence between sub-trusts may result in the partial loss of the capital gain tax exclusion upon later sale of the home; the sub-trust requires record-keeping, the filing of separate income tax returns each year, and may require periodic accountings and the survivor may lose the opportunity to secure a reverse mortgage, using the home as collateral.

Married couples who created Revocable “Living” Trusts prior to 2001, and many created afterward, would be well-advised to have their trusts reviewed by a competent professional so that the mandatory sub-trust funding instructions can, where appropriate, be modified to avoid unwelcome future surprises.

For more information please contact the Law Office of Sean D. Ethington at 661-295-4604 or visit our website at www.elderlawsite.com.

Santa Clarita Magazine

Santa Clarita Magazine