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When to Seek Review of an Ohio Irrevocable Trust

When to Seek Review of an Ohio Irrevocable Trust
August 1, 2016 Shannon Dawes
Ohio Irrevocable Trusts

Many forward-minded and conscientious adults carefully prepare an estate plan to safeguard both their own financial security and that of their loved ones. Unfortunately, this planning can go awry if the individual assumes that estate planning is a finite task that requires no further attention. Once an estate plan is in place, the strategies and documents must be periodically reviewed to ensure that they still comply with applicable law, continue to maximize financial benefits, and effectively address changing circumstances. In this blog post, we provide suggestions to help determine when you should have your irrevocable trust reviewed by an experienced Columbus estate planning lawyer.

Irrevocable trusts can provide many estate planning benefits, which include protection from creditors, tax liability mitigation, and probate avoidance, just to name a few examples. However, maximization these benefits might require modifying your irrevocable trust when appropriate. A trust can become obsolete and outlive its usefulness for many reasons that include changes in the legal landscape and your family or life situation. Some people with irrevocable trusts do not have their estate plan reviewed because they assume that “irrevocable” means that they cannot eliminate the trust. However, changes can be made under the right circumstances although the situations that allow for such changes depend on state law. By way of example, we offer a scenario below that might lead a Columbus estate planning attorney to suggest you seek legal advice about eliminating your irrevocable trust.

This scenario involves the use of a bypass trust through which assets in the amount of the federal estate and gift tax exemption of the first spouse to pass away are transferred into a trust. The surviving spouse has access to the income the trust generates and even the principal if needed. At the time of the surviving spouse’s death, the assets in the trust bypass the surviving spouse’s estate and pass directly to the couple’s children. This trust arrangement offers the primary benefit of making the estate tax exemption of the first to die spouse available to the couple’s children.

This approach was a strategy that made sense when the estate tax exemption threshold was only $675,000 per individual in 2001 or even $2 million in 2008. However, this threshold was raised to $5 million (plus adjustments for inflation) in 2013. Congress also changed the law so that a surviving spouse could take advantage of the unused exemption of a predeceased spouse. Put more simply, a husband and wife now have the ability to exempt $10 million (plus adjustments for inflation) from federal estate tax liability without the need to create a bypass trust. This option exists even if the predeceased spouse passed away before the law changed.

Based on this change in federal estate tax laws, elimination of a bypass trust might make sense if a couple collectively has less than $10 million (plus adjustments for inflation) in assets or the surviving spouse has less than $5 million (plus an adjustment for inflation) in assets. In this situation, the elimination of the bypass trust might yield a reduction in tax liability because when a person dies the assets in their trust have the tax basis increased based on current market value. This increased basis allows beneficiaries to sell assets in the trust without a capital gain.

Although you should not take the step of winding down a bypass trust without legal advice, this example illustrates the importance of having your estate plan reviewed from time to time to ensure that you do not need to make changes. Individuals engaged in estate planning should always seek legal advice before making changes because there might be reasons to maintain a current estate plan. However, state law might permit you to eliminate a bypass trust if it makes financial sense, such as where it no longer provides an economic benefit.

If you would like to an estate planning checkup, we invite you to contact us to schedule a consultation. Our Columbus estate planning attorneys at Dawes Legal, LLC can offer assistance with specific estate planning documents or a comprehensive estate planning experience. We invite you to call us today 614-733-9999 for your free consultation today.