Drafting and completing an estate plan is often looked at as an accomplishment. You may feel great that you were able to finalize something very resourceful that is very difficult to approach. However, just because you were able to initiate and complete the process does not mean that you do not need to revisit it again. In fact, if you have not touched your estate plan in the past few years, it is likely that your estate plan documents are no longer functioning the way you intended. Because tax laws can have an impact on trusts, these documents may need attention throughout the years.
How can changes in tax laws impact trusts? When federal estate tax laws change, certain steps, terms, or documents may be rendered unnecessary in some situation. For example, with the most recent changes to the federal tax laws caused credit shelter trusts and A/B trust to become unnecessary and even detrimental to the long-term interests of one’s family.
In the beginning of the millennium, we were informed that the federal tax exemption was $675,000 per person, resulting in any excess being taxed at 55 percent. In order to minimize the taxes placed on assets, life insurance, and retirement benefits, individuals drafted tax-saving trusts that were combined with asset titling and beneficiary designations. For married couples, this meant their go-to was a credit shelter trust or an A/B trust because they ensured a full funding of the federal estate tax exemption upon the death of the first spouse.
However, times have changed, and today the federal tax exemption has risen to almost $5.5 million. Because of this, credit shelter trust and A/B trusts are no longer needed in most situations. Because of this, estate plans that contain these trusts may need to be modified, otherwise they continue to exist and, failing to provide estate tax benefits and taking the funds away from other estate planning techniques that may be much more effective.
Trusts are frequently included in the estate planning process. However, those including these documents in their plan should understand how these entities could be impacted in the future, requiring modification. Obtaining advice during and after the estate planning process could help ensure that your estate plan is currently up-to-date and effective.
Source: Cincinnati Business Courier, “With changes in tax laws, it’s time to update your estate planning trusts,” Aug. 1, 2017