The Many Pitfalls of an Outdated Trust: How A Review Can Save Time and Money
It is incredibly important to have an Estate Plan in place, particularly for us California residents. I have written some articles recently on what you need at a minimum for your Estate Plan here.
However, if you have an Estate Plan already, that doesn’t necessarily mean you are in the clear. It’s a great idea to periodically review your estate planning documents to see if they still reflect your goals and desires.
Changes in life happen. Big life events like a divorce; a change in finances, retiring, births or deaths to family members named or that need to be added in your Estate Plan, and other events happen regularly.
Often, in the excitement of the moment or with the passage of time people will forget to update their plans in accordance with these big changes.
For many people who created Estate Plans years ago, those plans may include Trusts that are either unnecessarily complicated, or ineffective under the current Estate Tax laws.
In 2020 the Estate tax exemption is currently set at 11.58 million dollars and $23,160,000 for married couples. With very few people coming close to that threshold, many older Trusts, such as the formerly popular “AB Trust” have fallen out of favor.
The AB Trust essentially creates two Trusts upon the first spouses death. Following the death of the first spouse, a Bypass Trust would be established to shelter the estate tax exemption of the deceased spouse. Without this, the unused exemption amount of the deceased spouse would be gone.
These plans were advantageous because they were designed to shelter the Estate when the Federal tax exemption was much lower.
For reference, in 2000 the tax exemption was $675,000, in 2005 it was 1.5 million, and in 2009 it was 2 million per individual.
After 2010 it was raised to 5 million, which is when these trusts began to fall out of favor. In 2017 this amount was doubled to 10 million and now is set at 11.58 million.
Keeping older estate plans that include typical AB Trust provisions may require revision. This is because the distribution of the estate, under those provisions may be drastically different with current laws from what was planned at the time of creation. Further, they may be more costly and burdensome to administer and maintain for your heirs.
On the other hand, AB Trusts still have value in certain circumstances. Some cases where these may be advantageous include situations with blended families, protecting your Estate from subsequent marriages after you are gone, or in the event you want to control the distribution of your estate and assets to a degree from the grave.
In 2020, under the current laws, most people can do perfectly well for their Estate planning with a simple revocable Trust, which is easier to administrate and can be much less costly.
Also, it is important to review designations of individuals named in the Estate Plan such as guardians executors, trustees, those appointed durable powers of attorney, and health care agents, to ensure that they are still necessary and/or the desired person for the job.
Finally, just because your old Estate Plan has been rendered ineffective or does not reflect your current desires, that does not mean you need to or should toss your Trust in the trash can.
In San Diego, and California in general, if you dissolve your Trust, your assets could end up in Probate. This will typically result in substantial fees to Attorneys and Executors that could have gone to your heirs, as well as months of their time in Probate Court to wrap up your affairs.
So, if your Estate Plan was established 5 or more years ago, you should have it reviewed by an estate planning attorney to ensure that it is still will achieve your goals and will still maximize the benefits to your loved ones and beneficiaries.
Everyone’s goals and plans are different, Dennaoui Law is here to help you achieve your goals and your Estate Planning needs. Please contact us with any questions or to do a comprehensive review of your plan.
Dennaoui Law is able to help you prepare any and all of these documents at a moments notice. We are agile and tech friendly meaning these documents can be provided with a quick turnaround, 100% electronically to give you instant peace of mind.
Feel free to call Dennaoui Law Firm with any questions or contact us via email: [email protected].
Frank Dennaoui, Esq.
**TAX ADVICE NOTICE: Neither Dennaoui Law, the author, or the information in this article, provides tax advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax advice.**
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