Tax laws come and go. In fact, they seem to be ever-changing. For example, let’s take a quick look at The Economic Growth and Tax Relief Reconciliation Act of 2001. Instead of providing a specific estate tax exemption, it created different exemptions for each year. In 2007 through 2008, this exemption is $2 million. In 2009, it will be $3.5 million. And in 2010, everything you have will be exempt from estate taxes. It also created different estate tax rates each year ranging from 45 to 55 percent. And finally, if the law is not changed before 2010, it will revert back to the old law with an exemption of only $1 million!
What does all this mean? Further changes in the rules are almost a certainty!
Do all of these changes make your Trust invalid? No! However, amendments to the Trust may be needed to comply with the new laws or may be needed to make sure you get the most benefit from the new laws.
Changes You May Need to Make With Changing Tax Laws
Just a few years ago, the estate tax exemption was only $600,000. Since that was the figure for many years, estate plans established Bypass Trusts specifically referring to the $600,000 exemption. In 2009, the exemption will rise to $3.5 million. A typical Living Trust calls for the exemption amount to be placed (at death) into Trust for the surviving spouse and children, with the balance left outright to the spouse or in a separate “Marital Trust.” With the exemption amount rising, your entire estate could end up in the Trust, even if this is not what you intended and even if it does not achieve the intended tax results.
Make sure your Living Trust is flexible on that point, allowing for the annual increases based on a percentage of the estate and not a specified amount. Or the surviving spouse can be given the right to decide how much to place into the Trust using the “disclaimer” technique.
The “Disclaimer Trust” technique allows the surviving spouse to decide how much to place into the Credit Shelter Trust within nine months after the other spouse dies. The decision can be made based on the tax law as it exists at that time.
The “QTIP Trust” offers another potential solution to the changing estate tax laws: it permits the Executor to decide how much of the first decedent’s exemption to apply to the Marital Trust, of which the surviving spouse is sole beneficiary for life.
If you and your spouse have large estates, you could have the opposite problem of a Living Trust document that does not stipulate that the Credit Shelter Trust will be funded with the larger exemption amount that will take effect in 2009. In this case, adjustments would be needed to take full advantage of the increased exemption amount.
Even if you don’t have a Bypass Trust arrangement (for example, because you're unmarried), the larger exemption amount that will take effect in 2009 is a good reason to revisit your estate plan. For instance, an increased exemption means you could leave more directly to loved ones and less to charity without any federal estate tax bill.
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