We have talked several times in this blog about the consequences of failing to regularly maintain and update your estate plan. But what if one of the spouses has died and the trust has become wholly or partially irrevocable – is it too late? We get this question quite often when the surviving spouse or children realize that their estate plan may result in negative income tax consequences.
The problem results from the fact that we have seen several changes to the estate tax law over the last 20+ years. Most recent were the changes enacted in December of 2017. These changes over the years have increased the estate tax exemption from $600,000 per person back in 1997 to the current 2019 exemption amount of $11.4 million per person. In addition, back then the exemption amount could not be shared between a husband and wife. As of 2010, the exemption could be shared, meaning today a husband and wife can have $22.8 million in net worth and still not owe any estate tax. An improperly maintained trust can inhibit the ability of the heirs to receive the step-up in tax basis at death. The trust is set up to protect against estate taxes that would never be owed, but does it in a way that can increase income taxes for the beneficiary.
While updating the trust can eliminate this problem, if one spouse has already passed away these older trusts often become irrevocable in whole or in part. The good news is that most states still allow for the ability to fix these now irrevocable trusts. This can often be done by a family settlement agreement. In some cases, it may require court approval. But, this court approval is often easy to obtain if the surviving spouse and all of the beneficiaries are in agreement.
The famous judge, Learned Hand, once wrote in the case of Helvering v. Gregory: “[a]nyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.” Don’t choose to have your beneficiaries pay more taxes by neglecting opportunities to fix problems that can be fixed.