If you already have a trust, you should be commended for your wise planning. However, as time passes and laws change, it makes sense to review and update your trust to ensure that it remains consistent with your goals.
I spend a significant amount of my time each week reviewing legal documents drafted by other attorneys (and sometimes by me) and consulting with clients and other advisers with regard to my findings. Very often a revocable living trust drafted carefully and correctly years ago (then fully compliant with applicable laws at such time) is now significantly out of sync with current laws and/or the current objectives of the clients. Consequently, we often find that an update of the trust is needed in order to help the clients continue to accomplish their desired goals, now and in the future.
By analogy, please consider a Mercedes-Benz that was purchased in 1987, brand new, right off the dealer’s lot. On the day of purchase, this car was the latest and greatest and included all that was available in safety and other technology from one of the leading car manufacturers in the world. The buyer paid a premium for the brand, but also for the associated features and reliability that accompanied having a Benz–a German-made masterpiece. Well, now we fast forward 30 years to 2017. Since it is a Benz, that car is still on the road and it runs reasonably well. Routine and required maintenance has been done for the car over the years, including new tires, new brakes, oil changes and related work. There are a few dents and scratches and the interior is a little faded, with a few stains on the seats. But all in all, it still seems to be a good car. It gets the owner where he needs to go. Even so, in comparison to a 2017 Mercedes-Benz, the 1987 model is…well, not much of a comparison. In addition to being much more shinny and new in all respects, the 2017 model has a level of safety features, handling and numerous other innovations which just plain blows the 1987 model out of the water.
Though not a perfect analogy by any means, let’s use this car analogy to look at a trust from 1987. In recent days, I have reviewed a legal document from that time period. I know that when that trust was written 30 years ago it was a good legal document, fully compliant with then-current tax and other laws (state and federal) and written in a manner to help the trust-maker accomplish his stated objectives. However, much has changed in the past 30 years in the legal landscape, including the content and application of laws applicable to this trust (especially tax laws). Let’s just use one example on the tax law topic, that of the applicable federal estate tax exemption. In 1987, that amount was $600,000. Today, that number is $5,490,000 per person and if that person is married, he/she can actually double that amount through the use of the “portability” tax election. The result is that for just about any person you and I will meet on the street today, federal estate tax simply is not a relevant consideration.
A trust which was drafted in 1987, when the applicable exclusion amount was $600,000, will likely be a “credit shelter” trust (a/k/a “A/B trust”). About 95% of every existing trust agreement I have reviewed in recent years has fit into this category. Among other things, these types of trust structures most often require that upon the death of a person, mandatory allocations and divisions of trust assets must be made and then going forward, the trust must keep two or more sets of accounting to carefully track and preserve this division and separation of trust assets. While this type of trust will still “work” today, is probably is not needed. Sometimes it is “no harm, no foul” and among other things, CPAs still really like these types of structures because the same will require additional accounting work over time.
There are also other instances where this type of outdated trust structure is in fact problematic for the surviving spouse and other beneficiaries. Just last week, I encountered this type of trust structure–the mandatory A/B set-up which was drafted many years ago as it should have been (for the most part), but today its application could be very problematic for the surviving spouse and children. In fact, if we were to simply let the trust “run its course” as it was drafted decades ago, it could result in the children eventually paying more than a hundred thousand dollars of “extra” tax. On the other hand, as we take steps to update the estate plan, we should be able to prevent such massive amounts of extra taxes. Hopefully. This case has been a poignant reminder to me (and to these very nice people) that such outdated trust structures can sometimes be both unnecessarily burdensome in administrative requirements and also result in some cases in significant taxes and other costs for the beneficiaries.
By the way, I mentioned above the fact that most of us simply don’t need to be concerned about federal estate, gift or GST these days, given the current exemption amounts (unless laws change). Some mistakenly take this information and then conclude that estate planning has therefore become irrelevant. That is a very misinformed conclusion. Rather, the focus and structure of estate planning today is very different. Rather than focusing on the “death tax”, we now focus on such things as basis step-up and related capital gains considerations. These things have almost universal application to all persons and estates, assuming there is any asset which has increased in value over time (such as real estate, stocks and other investments). This basis step-up issue can come into play very significantly with regard to outdated credit-shelter trusts and if updates and needed improvements are not made to such trust papers, it may be that basis step-up is partially or fully forfeited, resulting in significant capital gains tax liabilities which could have been avoided (or at least substantially reduced) with more careful planning, including periodic updates of existing trust agreements.
To summarize, if you already have a trust, make sure the assets are legally connected to the trust (the most common problem). This means more than just listing assets on “Schedule A”. Then, once asset funding is complete, consider whether your trust structure still makes sense for you and your family. There is a good chance that the original structure of your trust is no longer applicable for you and your family. You likely will be better off with a more stream-lined approach, now and later.