We have recently written about living trusts, and their impact on estate taxes, but we feel the need to address this topic again, because of the uncertainly concerning the current federal estate tax laws, which expire at the end of 2012. We also focused on this topic this past Saturday on our weekly radio broadcast on KDOW 1220 AM.
If you have a living trust, the current uncertainty about this issue is a very good reason to take the time to understand the nuances of the subject, as well as to review with your attorney the current and potential future validity of your estate plan.
Some of the points we touched on during our broadcast include the flexibility of your trust, abandoning property, trustee powers, the impact of revised tax laws on your trust, the power of termination, and the complexities of trusts in relation to a non-traditional family structure.
Because we cannot be sure of the changes that may take place to the current estate tax laws, we believe an estate plan’s flexibility is the key to minimizing the taxes you ultimately pay. As a result of the current $1-million and $5-million estate tax-rate thresholds, your estate plan should account for the variances of the value of your trust fund.
Your estate plan should include contingencies for when the market is up or down at different points during the tax year. Due to the increasing prevalence of sudden spikes in stock market valuations, it is more-important than ever to understand your potential tax liability in relation to both the average daily value and the maximum value of your portfolio on any particular day during of the year.
It is also important to give ample flexibility to the trustee of a living trust or an estate, so that he or she can make decisions based on the current market conditions – especially if a trust fund could exist over an extended period of time.
An example of this type of flexibility might be a trustee’s ability to decide whether or not to abandon a piece of property, to cut operating expenses or future losses. It might be best financially for an estate trustee to just let go of a 40-year-old condominium that has lost most of its value and would be nearly impossible to sell in the current market, but which still carries the annual expense of a substantial maintenance fee. The ability to legally make that type of decision at the right time, instead of needing to confer and reach a consensus with all beneficiaries, is usually beneficial.
Other examples of sufficient flexibility would be a trustee’s ability to transfer the trust from one state to another or to divide an estate among heirs, so that physical assets are not split in half. For instance, a trustee could give a piece of real-estate to one sibling and an equal amount of cash and stocks to another sibling, so that the property could remain in the family rather than being liquidated. Or a trustee could split one trust fund into two, so each heir can manage their own assets.
A trustee should have the power to take advantage of any new tax laws, as well as the power of termination, so that a fund can be closed if the cost and effort of maintaining it would be more than its ability to significantly grow. For example, maintaining a trust fund might not be a good idea if it was established for five grandchildren and would exist for 20 years as written, until the youngest one turned 25, but which is only worth $50,000. An option available to a trustee with the power of termination would be to close the trust and disperse the remaining assets ahead of schedule, instead of spending lots of time and money maintaining it.
We also discussed, as part of setting up a trust, the need to establish a trustee protector, a mutually-agreed-upon person who would referee any disputes between a trustee and trust fund beneficiaries, as well as the option to establish a “No Contest” clause, which helps to prevent lawsuits by beneficiaries.
In the final segment of our weekly broadcast, we mentioned that a non-traditional family structure can add layers of complexity to setting up an estate plan that satisfies all beneficiaries. People who have children with multiple partners have several types of former and current relationships to consider – like when a wife from a third marriage continues to live in her deceased husband’s house until she dies, as a result of a “life trust” in the husband’s estate plan, even though, according to that plan, the house will eventually become the property of the first son from his second marriage.
During this election year, the status of estate tax laws will be a topic discussed in many forums, so we are sure to be speaking and writing about the subject again soon. In the meantime, we believe that, if you have not recently done so, this is an important time to review your estate plan with an attorney, especially if it includes a trust, so you can establish appropriate contingencies for the current period of uncertainty.
If you have any questions or concerns about your estate plan or trust fund tax law, please contact us to schedule a free consultation at one of our four conveniently-located offices in the San Francisco Bay area.