Rebecca and Adam prepared a revocable living trust many years ago. They did the right thing as they had a estate of about $1million at the time and a trust would definitely save them money if they died. They believed that once the trust was created and signed, they didn't need to update it – so they never even looked at again... that was, until Adam passed away.
After Adam passed Rebecca brought their trust to their attorney assuming everything was left to her since that is how they "set it up" years ago. Their attorney explained that they had a very typical trust set up with an "A-B" provision which was designed to eliminate or reduce estate taxes. But this provision made more sense when the estate tax exemption was between $600,000 and $675,000 as it was from 1987 – 2001 – now the exemption is $5,250,000.
Her attorney further explained that the provisions of the trust, which is now irrevocable because Adam died, requires that the trust estate be split in two – one-half will go to Rebecca and the other half into an irrevocable trust. She will receive all the income from this second trust but she can only use the assets for health, education, maintenance and support. Wait, what? Rebecca only gets to use half of her assets as she wants and the rest is restricted somehow? Yes.
The worst part is Rebecca didn't even need to do this to save taxes. As she and Adam aged they gave their children money, received less income from their investments and had increased health costs which significantly reduced their assets to about $800,000. They would not have to pay estate taxes even with the coming reduction of the estate tax exemption in 2013. This provision just didn't make sense given their situation today.
Now Rebecca must deal with this newly created trust which includes filing a separate tax return every year and she must put half of her money and other assets into it. This scenario plays out very often in my office but rest assured – there is a solution.
Schedule an appointment today for a free review of your trust to see if it contains the problems discussed above and learn how to fix it. Again, this was not a mistake by the attorney that drafted the trust originally – it was a mistake by Adam and Rebecca not to have it reviewed for 10 -20 years.