The high federal estate tax exemptions created by the One Big Beautiful Bill Act have made many older trusts obsolete, says a recent article from Barron’s, “Your Trust Is Out of Date. How to Fix It.” Reviewing trusts is critical as they may have become inefficient.
With the federal estate tax exemption at $15 million for individuals and $30 million for couples, the rigid language in some trusts leaving surviving spouses with asset restrictions may no longer be justifiable. Now that federal estate taxes are permanent, estate planning attorneys are examining older trusts. Should your trust be revised?
Many older trusts, especially the A/B trusts, contain rigid language limiting how surviving spouses can control family money after the first spouse has died.
When a husband and wife use an A/B/ trust, and the wife dies, the trust is split into two parts. The wife’s portion is placed in an irrevocable trust to support the husband, and whatever remains when he dies goes to the named beneficiaries. These trusts are now viewed as outdated because they tie up money in a trust, making it difficult for the surviving spouse to change the trust.
There are options if both spouses are still living. They can cancel the trust, retitle the assets and decide whether to use a different trust or get rid of the trust entirely.
A widow or widower stuck with one of these old trusts has limited options. Some trusts may have been written allowing the assets to move to a new one with fewer restrictions. If beneficiaries agree, the probate court can be asked to alter or terminate the trust.
Taking assets out of trusts may also minimize capital gains taxes for beneficiaries. When trusts distribute assets to beneficiaries, those assets are valued at their original purchase price, not at their fair market value as of the date the trust makes distributions. If the trust sells the assets and passes the proceeds to beneficiaries, it passes along the capital gains tax bill. If it distributes the asset, then beneficiaries can wait to sell, deferring tax bills.
Given the rise in asset values, including real estate and stocks, over the last two decades, beneficiaries may be hit with large capital gains taxes. If the same assets are in the estate, beneficiaries will receive a step-up in basis on any inherited. assets.
If the trusts permit, sending money to beneficiaries now while they are in lower tax brackets and having them pay the income tax is another option. Sometimes the trust may distribute a little extra money to help cover the cost of the increased income taxes.
In addition to checking on the trust itself, consider the value of the assets in the trust. Some trusts permit asset-swapping as an in-kind distribution without triggering taxes. Trusts ideally own assets that don’t produce much current income but have higher growth potential.
Consult with your estate planning attorney to see if the trust created before the OBBBA was passed still makes sense for your family and your future.
Legacy One Law Firm, APLC is an estate planning and probate administration law firm in Los Angeles, California, serving families throughout the State. Schedule a quick and easy consultation with our estate planning attorney, Sedric E. Collins, Esq., or call 323-900-5450.
