Question 23: What Happens If the Tax Law Changes? Is My Will or Trust Still Valid?
Tax laws come and go. In fact, they seem to be ever changing. For example, let’s take a quick look at The Economic Growth and Tax Relief Reconciliation Act of 2001. Instead of providing a specific estate tax exemption, it created different exemptions for each year. In 2007, this exemption was $2 million. In 2009 it was $3.5 million. And in 2010, everything you had will be exempt from estate taxes. It also created different estate tax rates each year ranging from 45 to 55 percent. And finally, when the law changed in 2010, it reverted to the old law with an exemption of only $1 million!! In 2017, the estate tax exemption is $5.49 million.
What does all this mean? Further changes in the rules are almost a certainty!
Do all of these changes make your Will or Trust invalid? No! However, amendments to the Will or Trust may be needed to comply with the new laws or may be needed to make sure you get the most benefit from the new laws.
Changes You May Need to Make with Changing Tax Laws
Just a few years ago, the estate tax exemption was only $600,000. Since that was the figure for many years, estate plans established Bypass Trusts specifically referring to the $600,000 exemption. In 2017, the exemption is $5.49 million. A typical tax planning Will or Living Trust calls for the exemption amount to be placed (at death) into Trust for the surviving spouse and children, with the balance left outright to the spouse or in a separate “Marital Trust.” With the exemption amount rising, your entire estate could end up in the Trust, even if this is not what you intended and even if it does not achieve the intended tax results.
Make sure your Will or Living Trust is flexible on that point, allowing for the annual increases based on a percentage of the estate and not a specified amount. Or the surviving spouse can be given the right to decide how much to place into the applicable Trust using the “disclaimer” technique.
The “Disclaimer Trust” technique allows the surviving spouse to decide how much to place into the Credit Shelter Trust within nine months after the other spouse dies. The decision can be made based on the tax law as it exists at that time.
The “QTIP Trust” offers another potential solution to the changing estate tax laws: it permits the Executor to decide how much of the first decedent’s exemption to apply to the Marital Trust, of which the surviving spouse is sole beneficiary for life.
If you and your spouse have large estates, you could have the opposite problem of a Will or Living Trust document that does not stipulate that the Credit Shelter Trust will be funded with the larger exemption amount now in effect in 2017. In this case, adjustments would be needed to take full advantage of the increased exemption amount.
Even if you don’t have a Bypass Trust arrangement (for example, because you’re unmarried), the larger exemption amount now in effect for 2017 is a good reason to revisit your estate plan. For instance, an increased exemption means you could leave more directly to loved ones and less to charity without any federal estate tax bill.
Using a Special Co-Trustee
Another way to give your Living Trust or Trusts created by your Will the flexibility to adapt to changing tax laws is by appointing a “Special Co-Trustee” or “Trust Protector.” This person would be unrelated to you and should be unbiased. They would only be given the authority to exercise certain powers that might be a problem if the regular trustee exercised them, like exercising power over a life insurance policy.
Additionally, a Special Co-Trustee can be given the power to amend the Trust to cover unforeseen circumstances and law changes. For instance, in the year 2018, there is no estate tax, so a Family Trust or Credit Shelter Trust may be unnecessary. A Special Co-Trustee could terminate either of these Trusts if you were to die in 2018 and give the proceeds directly to your spouse.
And what about changes in circumstances? When you create a Trust, you may intend to give equal shares of the estate to each of your children. However, years later, this may not be the best thing. Perhaps one of your children will have become disabled and will need more money due to the medical care needed. Or perhaps one child will be headed for bankruptcy and the proceeds of the estate will only be taken by creditors. The Special Co-Trustee can adjust your plan to respond to these changing circumstances.
Changing Tax Laws Are Only One of the Reasons to Review Your Estate Plan
Estate planning is not something you do once, tuck away in a file, and forget. It is something that needs to change with the changing times, circumstances, and laws so that you can accomplish the goals you originally set out to accomplish.
One of the main reasons for reviewing your estate plan is the changing tax laws. These tax changes are not the only reasons, however, to review your plan. Here are nine others:
- Change in Residence. Each state has differing laws. Therefore, if you move to another state, you will want to be sure that your Will or Trust uses the state laws to your advantage. This is particularly true if you move from a separate property state to a community property state or vice versa.
- Change in Assets. When your assets change significantly, you may be able to employ different estate planning tools.
- Inheritance. If you or your spouse have received or expect to receive a significant inheritance, there may be new opportunities to reduce taxes or provide creditor protection.
- Changes in Non-Tax Laws. Some laws are created that affect the dispersal of property and/or how your Estate or Trust may be managed. Your Will or Trust needs to be written with these new laws taken into consideration.
- Change in Desires. When you are 25, you may have certain desires concerning your estate. However, these desires may be entirely different when you are 55. As your desires change, you will need to revise your estate plan to match the new desires.
- Illness. Those that are ill often have special needs. You may want to change your Will or Trust to accommodate these special needs. You will also want to be sure that the Will or Trust does not keep special needs beneficiaries from being eligible for government benefits such as Medicaid.
- Birth or Adoption of a Child. As you acquire a family of your own, you will find that you want your assets to be divided differently. Often, parents and siblings will take a back seat to your children. Your Will or Trust will need to reflect these changes.
- Divorce. A divorce can radically alter your Trust since often a Trust is Co-Trusteed with both spouses. Additionally, goals within your Will or Trust for caring for the ex-spouse will no longer be part of your plan.
- Marriage. Marriage can automatically give each spouse some rights in each other’s property. However, marriage does not automatically change your Will or Trust to provide for the new spouse.
Nobody can anticipate how our lives, our society, or our laws might change over the coming years and decades. A qualified estate planning attorney can help you include as much flexibility as possible so that your plan will bend with the changing times.