Dear Mr. Premack: I hired a skilled estate planning attorney to
write wills for my wife and I about 15 years ago. He is no longer in
practice, and we have not reviewed our wills with an attorney since then.
As I read them, here is my concern: they seem to require that when one of
us dies, part of the estate goes into a family trust and part might go
into a marital trust. I can’t really tell by reading the legalese exactly
how much would go into each trust, but I don’t remember why the lawyer
would have written the wills in this manner. If I die, I want everything
to go to my wife (and she wants everything to go to me). Are you familiar
with the type of will we have? Can you explain why it was set up in that
fashion? Thank you. – H.R.
Back in 1998, when your wills were
written, the federal estate tax law was very aggressive. All value in an
estate which exceeded a $625,000 tax credit was subject to a 50% tax.
There also was (as is) a marital deduction for any assets left directly to
the surviving spouse, but the deduction is not a tax reduction. Here is an
It is 1998. Bob and Pasty have an estate valued at
$900,000. They have wills leaving everything to each other. Bob dies, and
because of the marital deduction, there is no estate tax. Patsy now has an
estate of $900,000. Six months later she dies, leaving the estate to their
daughter. The first $625,000 is free of estate tax. The remaining $275,000
is taxed at 50%, so daughter loses $137,500 to the estate tax. Note that
only Patsy’s tax credit was used; Bob used the marital deduction and
wasted his tax credit.
The bypass wills your attorney wrote for
you in 1998 were designed to eliminate all that estate tax. It is 1998.
Bob dies with his bypass will. His half of the estate ($450,000) is given
to the “family trust” which uses his tax credit to zero the estate tax.
The marital trust gets zero assets due to the size of the estate. Bob
“bypassed” giving the estate to Patsy, who only owns her half of the
estate ($450,000). Bob’s half is in the trust, and is not part of Patsy’s
taxable estate. Patsy dies six months later, leaving her estate to their
daughter. Daughter gets $450,000 from mom, tax free and gets $450,000 from
dad’s trust, tax free. That is why your 1998 wills were written in that
Happily, in 2013 the federal estate tax is far less
aggressive. We now have a permanent tax credit of $5.25 million (adjusted
higher each year for inflation).
Unhappily, this means you need
to change your wills as soon as possible. Why? Because the wording in your
wills requires the family trust to receive part of your estate when you
die even though the tax which motivated that structure is no longer
imposed. If you die, your wife will have to deal with the marital trust,
its tax return, its separate accounts and its restricted access to the
funds it holds. Those tasks and restrictions are no longer necessary. You
and she can return to simpler, less intrusive wills. Again, an example:
It is 2013. Bob and Patsy have outdated 1998 bypass wills. Bob dies.
His will requires that $450,000 be held in trust. Patsy must segregate
those funds into separate accounts, get a new tax ID number for the trust,
and file an annual return for the trust. She can use the funds only for
her health, maintenance and support. She owns her half of the estate, and
dies six months later. Daughter gets mom’s half and gets the trust, all
tax free, but must go through the process of shutting down Bob’s trust.
The trust saved no taxes and was an administrative burden.
and Patsy make new, less complex wills, they can eliminate the martial
trust and leave everything to each other. Bob dies, and because of the
marital deduction, there is no estate tax. Patsy now has free access to
the entire estate, free of tax and free from trust. Six months later she
dies, leaving the estate to their daughter. Due to the $5.25 million tax
credit, their daughter gets it all tax free, and free from trust. Many
hassles and much expense can be avoided if people with outdated bypass
wills get them updated and simplified as soon as possible.