The Two-Trust Time Bomb: Do you still need two trusts?
Dear Clients, Colleagues and Friends,
I just spent five hours wrestling with a client’s thirty-page 1988 trust agreement, trying to figure out what he can and cannot do with certain property now that his wife has passed away. Another lawyer in a different state, where the property is located, has probably spent as many hours on the same problem – not cheap. The fundamental problem is that the couples’ trusts were set up when they had significant exposure to federal and state estate taxes. Now, mostly due to the raising of the threshold on those taxes, many of the complex restrictions in the trust agreement are worse than useless – they don’t save taxes, but they may prevent the client from doing what he wants to do with the property (or at least, doing it simply and inexpensively). By the way, the total net worth of the client and his late spouse is not much more than a million dollars – so don’t think these problems only apply to Warren Buffett or Bill Gates.
This is a plea to review your estate plan with your lawyer whenever there’s a significant change in your life, like retirement, health problems, significant income or asset changes, or (of course) death or divorce of your spouse. This is also a plea to check with your lawyer every few years to see if the LAW has changed in a way that applies to you. In particular, if you are married and you and your spouse EACH have a revocable trust (or an IRREVOCABLE) trust, you should check with your lawyer to see if that structure is still necessary or advisable. Most two-trust plans were set up before the dramatic increases in estate-tax thresholds after 2011. There are other reasons for spouses to have separate trusts – asset protection in the event of remarriage, for example – but it is MUCH easier to simplify your estate plan, sparing your loved ones difficulty and expense – while you are still alive. If you live in New Hampshire (no estate tax), Vermont ($2.5 million threshold before you are liable for the State estate tax) or Maine (equal to the Federal threshold, so no estate tax until you have $5.45 million, or nearly $11 million per couple), the reason for creating two trusts probably no longer exists. My Massachusetts clients are more likely to need two trusts, since they hit the State estate tax at $1 million per spouse (including life insurance and retirement accounts).
This client and his wife actually combined their trusts into a single joint trust many years ago – but it still contains about ten pages of troublesome tax provisions that I wish we could just tear out, since the tax no longer applies to my client and the provisions just tie his hands.
If you have two trusts, or if it has been more than five years since you’ve reviewed your estate plan and you’re not sure if tax provisions in it still make sense, email me or call Paralegal Lynne Draper in our office to schedule an appointment for a plan review. Email me