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