This column first appeared in the San Antonio Express-News on March 31, 2016.
Dear Mr. Premack:
Our children did not have children. Most everyone in family our is still living. Our charitable gifts have not changed. Our Wills were last updated in the late 90’s, and included something called a by-pass trust. Our estate size has been holding steady at around $3 million. My husband says we do not need to update our Wills. What can I tell my husband to get him to update our Wills? Thank you. OPQ
There are a variety of reasons that Wills should be updated. In your letter you highlight a number of them. For instance:
1) Have there been any changes in your family? Certainly anyone who is getting divorced should be modifying their Will immediately. An update is warranted if anyone listed in your Will dies, becomes disabled, or if new family members are added.
2) Do you want to change the way your estate will be distributed? Many people leave their estates to their spouses, then their children, then their grandchildren. Without grandchildren it is often wise to list your favorite charities as contingent devisees. If your goals change or a prior charity falls out of favor, you should update your Will.
3) Have Texas laws changed? Generally, the State of Texas makes an effort to never invalidate an existing Will by changing the law. But a Will does not need to be completely invalidated by a law change in order for you to need an update. For instance, a few years ago the legislature changed the way that Will contests can be dealt with in your Will. A provision made before the law was changed may be unenforceable, even if the Will overall is still valid. Updating to deal with new Texas laws should be routine, and you should talk to your estate planning attorney at least every other year to see if the laws have changed.
4) Have Federal laws changed? Often, changes in Federal law do not have a large impact on a Texas Will. There are exceptions, some of which are major.
You say your current Wills contain a By-Pass Trust, that your estate is worth about $3 million, and that the last update was in the late 1990’s. The by-pass trust exists as an effort to avoid or reduce Federal Estate Taxes. By way of history, in the late 1990’s any estate value exceeding $675,000 was subject to Estate Tax at a 50% rate. That is a huge tax, and most people found it objectionable.
Attorneys devised a method to double the exemption to $1,350,000, potentially saving a married couple around $337,000 in taxes. The idea was that when the first spouse died, that spouse’s Will did NOT leave all the assets to the surviving spouse. Instead, the surviving spouse was “by passed” and part of the estate was placed into a By-Pass Trust. The transfer to the trust was actually a taxable event, but the tax was eliminated with the deceased spouse’s exemption. Thus, the funds in the By-Pass Trust were free of estate taxes.
For several decades, that idea was embraced by a wide variety of married couples whose estates exceeded the $675,000 exemption amount. But in year 2001, the exemption was raised by a change to Federal Law to $1 million and continued to grow to $3.5 million in 2009. Now, the exemption amount has reached $5.43 million – which has eliminated the need for any estate below $5.43 million to have a By-Pass Trust. In fact, the idea of doubling the exemption for both spouses has now become part of Federal law, so up to $10.86 million can pass free of estate taxes.
Here is the problem: most By-Pass Trusts require that the maximum amount be transferred into trust when the first spouse dies. Even though the tax motive for the By-Pass Trust is gone, the Trust still exists. It is unnecessary, burdensome and expensive. Your husband and you should modify your Wills to eliminate the By-Pass Trust, because it won’t go away on its own. If you leave it in place, instead of saving money it will add time, expense and burden to the administration of your estates. See your attorney now to update!
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues.