Is it time to update your old trust?

I review many trusts, and some of them are quite old. After these old trusts were put in place lots of things have changed: the federal estate planning laws, the Arizona Trust Code, and of course, the situation of the people who are included in the trust. When so much has changed, it’s clearly time to update the trust.

When we do an update, we usually do a complete amendment – called a restatement – of the trust. We keep the original trust name and date, and just note that it was restated as of the date we sign the new documents. That way, anything already titled to or transferred to the trust is still in the trust – we have no need to change the title on homes or bank accounts again.

So what kinds of changes might be suggested for an older trust? First, for a couple who has a joint trust, the old trust may require a split into “A” and “B” trusts on the death of the first spouse. The B trust is usually the deceased spouse’s trust and contains his or her separate property and his or her share of the community property. The surviving spouse still benefits from the trust, at least to the extent of receiving income. However, that trust is irrevocable. It cannot be changed. In addition, that trust now has its own tax identification number and the trustee must file separate tax returns for that trust.

Often the sole reason for this division into A and B trusts is estate tax planning. These older trusts were designed to avoid federal estate taxes back when the exemption was much lower (at one point only $650,000). The trust provides for division into A and B Trusts to maximize the deceased person’s tax exemption.

Now, however, each person’s exemption – the level at which the federal estate tax kicks in is $11.4 million per person. In addition, Congress has made a person’s federal estate tax exemption “portable.” In simple terms, “portability” means that when the first spouse dies, the surviving spouse can file an estate tax return and pick up the deceased spouse’s unused federal estate tax exemption and add it to her own exemption. Portability of the exemption has been made permanent.

Because of this change in the federal estate tax laws, not many of us need to worry about or plan for federal estate taxes. The division into two trusts may not only be unnecessary but undesirable. When we look at whether to update these provisions of your trust, we analyze all of this and decide what is best for you given your situation and how the estate tax laws impact you.

Another reason for a change may be in how your assets are distributed to your beneficiaries on your death. Let’s assume you have two children, and they are already adults over age 35. Your old trust may provide that they get distributions of one-third of their inheritance at ages 25, 30 and 35. Since they are older than this, they get the entire inheritance in an outright distribution.

That may not be the best idea, however, and the changes in the Arizona Trust Code let us distribute their share in a trust for them that can be very beneficial.

An example that could be plucked from the 2008 economic disaster shows what can happen (and a court case on this issue exists, so it is a real issue). Son started a business, but in the economic downturn, it didn’t make it. He filed bankruptcy. Within a few months after filing, Mom passed away, leaving him everything in an outright distribution. It was all his. Except it wasn’t his. Instead, because he had filed bankruptcy, it all went to his bankruptcy trustee.

If Mom had given the assets in trust, we may have been able to save that inheritance to give son a fresh start. But she didn’t, so the bankruptcy took all she worked so hard to leave behind.

Another example is the beneficiary with a rocky marriage or who is going through a divorce, the continuing trust can assure that your beneficiary gets your money. By keeping assets in trust, you can ensure that your trust assets do not go to a former son-in-law or daughter-in-law, or their bloodline.

An inheritance is separate property, meaning that your beneficiary’s spouse isn’t entitled to it in a divorce. However, if you give the money directly to the beneficiary and she commingles her inheritance with assets of the marital community, they are no longer separate. When you convey your assets in a continuing trust, the assets remain separate property, and are protected from being divided up in a divorce.

The Trust may protect the inheritance in the event of your heir’s death as well. Let’s say your daughter inherits from you and puts everything in joint accounts. On her death, her husband will receive all of the inheritance because it is now joint property. And then, what if he remarries and doesn’t put a plan in place for those assets to go to your grandchildren? The assets may go to the new wife, and when she dies, to her children. With a trust, you can make sure it goes where you want it to – you can even benefit your daughter’s husband during his life if you daughter dies first, but be sure that ultimately your grandchildren receive the inheritance when their parents are both gone.

Everyone should have their estate plan reviewed every three to five years. In particular, if you are married and your estate plan is more than a few years old, please contact us for our no charge review so that together we can determine if an the plan you put in place still makes sense for you and your family. Call 602-375-6752, email Libby@libbybanks.com or go online to schedule a consultation at https://libbybanks.com/schedule-estate-planning-meeting.