By Dan Barney

Estate Planning & the Law

Many people currently have trusts that were created 10-20 years ago that will not accomplish what they were intended to achieve. This is a trap that has been created by the changes in the federal exemption levels.

If your family created a trust and have not updated that document, it may create a problem for the spouse that survives. Although this may seem unusual there are many local families for whom this is a real issue. The problem is as follows:

• The use of an “A-B” trust was very common in the '80s and '90s. It was a way to insure that a couple used all of its allowable exemptions for estate tax purposes.

Essentially the concept involved setting up an Exempt trust often called a “Family” trust when the first spouse died – that trust was filled with the assets of the deceased spouse equal to the federal estate tax exemption level so that they would not be subject to any estate tax. All other assets of the couple went into a Marital trust.

To remain exempt the Exempt trust was subject to terms that would limit the surviving spouse’s access to the funds therein.

On the other hand, the survivor then had full control over and access to the Marital trust to live on. Then upon the death of the survivor their estate could also utilize the full federal exemption against the transfer of assets from the marital trust. Together, then, the couple would utilize all of their allowable federal exemption.

• Many families have such a trust. In many cases, those were created when the exemption was equal to or less than $625,000.

And therein lies the problem – although the original trust and estate plan were based upon a $625,000 exemption and amounts over that were under complete control of the surviving spouse – today with an exemption level of $11.5 million, all of the assets of the deceased spouse’s share must go into the exempt trust over which the survivor has no direct control.

As a result, the surviving spouse cannot control those assets, cannot gift them to others and cannot change the distribution of assets from that trust as she would like.

We see repeated instances of this problem or we see survivors who violate the terms of the trust by trying to ignore the original terms of the trust by failing to properly distribute assets to the exempt trust.

This can create legal challenges and conflict with in a family.

What options are available if a survivor finds themselves in this situation? A look at the normal options available next week.

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