KISSING THE GORILLA
For the law firms who don't send disclaimers
out explaining the estate splitting language in their older
trusts for clients, or offer to update the language - could be like "kissing a gorilla"
when unnecessary splitting is required at the first
death. It just might be extremely uncomfortable when a
Successor Trustee has to split a trust for no reason!
But, the reverse could also be true. A
law firm or document preparer might have taken out your
"A/B" or "A/B/C" language (or is trying
to do that now). They think the temporary $5,000,000 per
spouse exemption from estate tax per spouse and $10,000,000
limit if the "portability" clause applies, will extend
beyond December 31st, 2012. Or they know something you don't
- that you will die before January 1st, 2013 in order
to use these higher limits!
By the way, you need to be married for this
page to apply to you and you have to have enough money to
warrant having an A/B or A/B/C living trust that splits
assets into sub-trusts (the B trust is called a bypass
trust) on the first death of you and your
spouse. So if you don't have a million dollar estate, don't
be too concerned about what this page has to say.
But, if you do, make sure your lawyer or document
preparer understands just how important proper language and
flexibility is right now during this temporary estate tax
law period of January 1st, 2011 to December 31st, 2012.
After that date, only $1,000,000 of combined estate assets
(in or out of trust) applies to be able to be estate tax
free by the conclusion of both the first and second death of
In other words, obsolete "split" wording can
be either an unnecessary inconvenience to your surviving
spouse, or a tax trap. Few law firms in Arizona stay on top
of serious law changes as they feel it is your duty to
contact them if you have any questions or changes. It is
doubtful your spouse or heirs will have a case against a law
firm that failed to update your trust as few lawyers would
sue each other in our state. But, there is a problem
out there in the estate documents world and it would be wise
to make sure it doesn't affect you!
You see, way too many law firms producing estate planning
documents set up their trust modules (software) to be quite
rigid when it comes to doing the splits in a marital trust.
What we mean is the division into two or more separate
trusts (sub trusts) upon the death of the first Trustor.
These trusts most commonly known simply as the A/B or A/B/C
trusts -- incorporate a required "division" of estate
trust assets at the first spouse's death. And these
instructions required by the document can easily become
This has happened as the estate tax exemption
limit increased over the last decade. More recently,
it also happened when the exemption from estate tax limits
increased while estate assets fell in value.
(2008 financial crisis) Then during 2010 when the estate tax
was eliminated just for one calendar year.
Many older trusts not updated will not
allow splitting on the first death if no inheritance tax is
due on the first death. A five million dollar
could be clear of estate tax on the first death in 2011 but
get hit with over 40 % estate tax when the second spouse
passes away in years after 2012 under current law. That could send
up to 1/2
of the money to the IRS (due in 9 months) and perhaps all
because the trust document failed to address our current
quagmire of complicated estate tax law. One need not fear future estate tax law if you
take the time now to draft enough contingencies to cover
just about any future scenario.
Other trust owners have the opposite problem.
They have proper trusts documents that authorize estate
splitting into a sub-trust or trusts at the first death of a
marital trust but the splitting may not be necessary!
The "trigger" in the outdated trust documents may need to be
"reset". Otherwise, they may force the
Successor Trustee to split the assets even though no tax
savings will result. Or force the Successor
Trustee to forego the written legal instructions
dictated in the legal "contract" of the trust instrument -- thus opening themselves up to a can of worms
with potential challenges by heirs and regulators if
The problems could best be avoided by taking a look at
these trusts in 2011 while the mistakes of estate document
drafters are more or less covered with the high temporary
estate tax limits apply.
After that, it is anyone's guess on what will
be law in this country if you read the blogs and hear the
political chatter about this important subject. Many
trust advisors have thrown their hands up in disgust not
knowing what to do or what to draft for their clients to
cover this problem. WE ARE NOT ONE OF THOSE FIRMS!
After over 17 years of legal document
practice, we have observed that a surviving spouse has a
tendency to do what ever they want after the first death.
But, comments such as "I never did understand that
trust!" do not hold up if an estate split was
ordered and never done. And if someone comes to the
door asking why you didn't follow the terms of the trust, an
excuse may not hold much water. Wouldn't it be better
to have your trust cover all the contingencies? We do
that automatically if you allow us to update or create your
living trust documents.
To set ourselves apart from this problem,
since day one we have always felt it was most important to
draft a "convertible" trust that simply covers the multiple
contingencies that could exist upon the first death. Then
react accordingly. Sadly, few other legal documents we
review contain convertible (thus flexible) wording in this
Getting this area of estate planning wrong,
the surviving spouse or heirs can be injured. And, the
embarrassed advisor or document preparer who is caught in an
act of malpractice for not being more careful in wording
your living trust, most likely would rather
kiss that gorilla we
mentioned then to face the music for ignoring such an
important area of practice that requires precise knowledge
and subsequent wording to keep the gorilla at bay!
Sending Your Hard Earned
Money Into an Inherited IRA Hell
1998, our firm has been an Inherited IRA consultant firm.
After all those years, we have set ourselves apart here in
Arizona as well as across the nation in this important area
of estate planning. If you type "inherited IRA expert"
into your Google browser, we most likely will come up
first on page 1 of search results!
Since IRA type "qualified" assets normally
represent the largest single asset
besides the estate home in most estates, the planning
required can not be ignored. But it is. We get emails and
phone calls every week and listen to horror stories from
banks, brokers, and insurance agents who malpractice greatly
in their advice they give. And, sometimes, so do CPA's and
For that reason, we
DO incorporate a Legacy IRA trust (sub-trust) that meets
stringent IRS rules for leaving a larger IRA/401(k) fund
direct to your trust as beneficiary (AKA as an Inherited
IRA). But, we inform clients that the testimonial
sub-trust named as a primary IRA beneficiary can cause an
Inherited IRA hell unless stringent rules are followed
explicitly. Successor Trustees that don't understand
their responsibilities in administering qualified assets
sent to the trust at the death of the Trustor(s), can easily
trigger a rule or law violation and cause the money to be
taxed over a short 5 year period, a year after the death, or
worse -- the same year as the death if they cash the money
in or fail to transact a direct transfer properly. (they can
make a mistake merely by filling the beneficiary claim form
Some may feel a separate "Legacy" IRA trust
is needed besides your revocable living trust. Our
firm believes that if a "B" trust or "B & C" trust is born
by testamentary provisions in the
trust language upon the first death, it can work just as
well to birth a testamentary sub-trust for your Inherited IRA type account.
(To receive your qualified dollars and create an Inherited
IRA) It helps keep things simple and helps keep the
legal fees (or legal document fees) bill down as well!!!
To read more about Inherited IRA's and Living
Trusts, review our popular Inherited IRA website at:
Avoiding Inherited IRA Hell