Americans
were once trust-happy. Now many are having second thoughts, and rightly so.
How irrevocable is the so-called
irrevocable trust? Well, many people are ready to find out as they consider
changes to their trusts now that ATRA 2012 is in the mix.
Forbes recently considered this question in an article aptly titled
“How To Kill An Irrevocable Trust.”
Historically, irrevocable trusts
have been pretty useful legal tools, especially for estate tax planning. While
over time the trusts have changed very little, the same cannot be said for the
estate tax laws. Now, and perhaps forever more if Congress doesn’t undo the
American Taxpayer Relief Act of 2012 (ATRA), an individual can exempt $5.25
million from their estate or pass that exemption on to their spouse.
Back in the day, things were not
always so generous. Many married couples had “bypass trusts” which are
“irrevocable trusts” established upon the death of the first spouse to secure
the estate tax exemption available to the estate of the deceased spouse. Since
many estates of the surviving spouses who are beneficiaries of these bypass
trusts will be well below the $5.25 million exemption, even counting the bypass
trust asset values, some may want to consider revoking the bypass trusts.
Arguably, this could simplify life for the surviving spouse.
Another form of irrevocable
trusts was one established to own life insurance “outside” of the estate of the
insured. These were established for myriad reasons, to include providing estate
liquidity for estate taxes and business succession planning. Again, if the
primary motivation for creating these irrevocable trusts was estate tax driven,
then perhaps revoking the irrevocable trusts is an option for simplicity.
The original article speaks to
some of the mechanics required to revoke the irrevocable.
Is it a good idea for you to
kill your trust? That depends a great deal on the trust and on you, not to
mention state law. In fact, trusts are such powerful devices that many are still
choosing to create them, ATRA or not. It’s a cost-benefit analysis, so do take
care to think of the benefits.
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Reference: Forbes (June 5, 2013) “How To Kill An Irrevocable Trust”