Dear Mr. Premack: I hired a skilled estate planning attorney to write wills for my wife and I about 15 years ago. He is no longer in practice, and we have not reviewed our wills with an attorney since then. As I read them, here is my concern: they seem to require that when one of us dies, part of the estate goes into a family trust and part might go into a marital trust. I can’t really tell by reading the legalese exactly how much would go into each trust, but I don’t remember why the lawyer would have written the wills in this manner. If I die, I want everything to go to my wife (and she wants everything to go to me). Are you familiar with the type of will we have? Can you explain why it was set up in that fashion? Thank you. – H.R.
Back in 1998, when your wills were written, the federal estate tax law was very aggressive. All value in an estate which exceeded a $625,000 tax exemption was subject to a 50% tax. There also was (and is) a marital deduction for any assets left directly to the surviving spouse, but the deduction is not a tax reduction. Here is an example:
It is 1998. Bob and Pasty have an estate valued at $900,000. They have wills leaving everything to each other. Bob dies, and because of the marital deduction, there is no estate tax. Patsy now has an estate of $900,000. Six months later she dies, leaving the estate to their daughter. The first $625,000 is free of estate tax. The remaining $275,000 is taxed at 50%, so daughter loses $137,500 to the estate tax. Note that only Patsy’s tax exemption was used; Bob used the marital deduction and wasted his tax exemption.
The bypass wills your attorney wrote for you in 1998 were designed to eliminate all that estate tax. It is 1998. Bob dies with his bypass will. His half of the estate ($450,000) is given to the “family trust” which uses his tax exemption to zero the estate tax. The marital trust gets zero assets due to the size of the estate. Bob “bypassed” giving the estate to Patsy, who only owns her half of the estate ($450,000). Bob’s half is in the trust, and is not part of Patsy’s taxable estate. Patsy dies six months later, leaving her estate to their daughter. Daughter gets $450,000 from mom, tax free and gets $450,000 from dad’s trust, tax free. That is why your 1998 wills were written in that fashion.
Happily, in 2013 the federal estate tax is far less aggressive. We now have a permanent tax exemption of $5.25 million (adjusted higher each year for inflation).
Unhappily, this means you need to change your wills as soon as possible. Why? Because the wording in your wills requires the family trust to receive part of your estate when you die even though the tax which motivated that structure is no longer imposed. If you die, your wife will have to deal with the family trust, its tax return, its separate accounts and its restricted access to the funds it holds. Those tasks and restrictions are no longer necessary. You and she can return to simpler, less intrusive wills. Again, an example:
It is 2013. Bob and Patsy have outdated 1998 bypass wills. Bob dies. His will requires that $450,000 be held in trust. Patsy must segregate those funds into separate accounts, get a new tax ID number for the trust, and file an annual return for the trust. She can use the funds only for her health, maintenance and support. She owns her half of the estate, and dies six months later. Daughter gets mom’s half and gets the trust, all tax free, but must go through the process of shutting down Bob’s trust. The trust saved no taxes and was an administrative burden.
If Bob and Patsy make new, less complex wills, they can eliminate the bypass trust and leave everything to each other. Bob dies, and because of the marital deduction, there is no estate tax. Patsy now has free access to the entire estate, free of tax and free from trust. Six months later she dies, leaving the estate to their daughter. Due to the $5.25 million tax exemption, their daughter gets it all tax free, and free from trust. Many hassles and much expense can be avoided if people with outdated bypass wills get them updated and simplified as soon as possible.
Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2012) practicing estate planning and probate law in San Antonio.
Original Publication: San Antonio Express News, January 28, 2013