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March 2013

Old Trust Provisions May Cause Unintended Results

With the new expanded estate tax exemption, some existing formula allocation clauses may hold adverse consequences for the surviving spouse

On January 1, 2013, Congress passed and the President signed into law the "permanent" extension of the $5.25 million personal exemption from estate tax and generation-skipping tax. This is indexed for inflation and will increase over time, unless changed.

If Congress had not acted, the personal exemption from estate and generation-skipping tax would have reverted to the pre-2001 level of a $1 million exemption from estate tax and generation-skipping tax. Please recognize that this change in the law is permanent only until some future Congress changes it again.

We recommend that, in the wake of the new tax law, you review the provisions of your trust agreement to ensure that the language in your trust does not cause unintended consequences.

Because of the size of your estate, you may no longer need to create separate trusts at the time of a first spouse's death, even though there can be non-tax driven reasons to continue that structure.

You should also be certain that the "formula allocation" provisions of your trust do not allocate most or all of your estate to a generation-skipping tax-exempt trust for your grandchildren and bypass your spouse or children with the majority of your estate. This is more often likely to occur in blended families, where effort has been made in the trust provisions to financially provide for children of a prior marriage as well as a new spouse. However, this type of formula allocation can happen in any family’s trust.

If you have not reviewed the dispositive provisions of your trust in the last three years, you would be wise to do so in light of this new legislation. In many trusts, in order to minimize future anticipated estate taxes, formula allocations are made to trusts for the benefit of children and/or grandchildren, with the excess available for the surviving spouse. With the new expanded estate tax exemption, some existing formula allocation clauses may cause the unintended result that there is no excess remaining for the surviving spouse.

 

about the author

Jim Ryan advises and assists Arizona business owners and high net worth individuals in sophisticated estate planning, corporate transactions, business planning and estate administration.

Jim is a Certified Specialist in Estate & Trust Law (Arizona Board of Legal Specialization) and is listed in the current editions of  Super Lawyers and The Best Lawyers in America.

He is a member of the American College of Trust and Estate Counsel, past chair of the State Bar of Arizona's Estate and Trust Advisory Commission, and a member of the Executive Council of the State Bar's Probate and Trust Section.

Jim co-authored the 2012 edition of the "Arizona Probate Code Practice Manual."