After EGTRRA, Clients With Trusts Need Revisiting

Going forward, planners like Buxbaum are busy visiting those clients who put their estate planning on standby as EGTRRA was being debated. “It takes quite a long time to cycle through all the people you had waiting to see what was going to happen,” he says.

With the changing exemptions every year, Buxbaum has been showing clients exactly what it will look like in each year, should someone die.

“You can hypothetically illustrate someone’s death in any year and see what the tax is going to look like under the new system,” he says.

“When everyone does finally get the correct information regarding the new tax law, it has made them aware that everything needs to be extremely flexible,” says Flotron.

Oliver notes that more flexibility is a requirement not only due to EGTRRA, but also because of the recent loss of wealth from the downturn in the financial markets.

“You’re trying to address that ‘What if,’” he says. “What if estate taxes go away, what if you need the money?

“I think as agents, and as advisors, we really need to start dealing with the ‘What ifs’ not only from a tax planning standpoint, but from a financial well-being standpoint as well,” Oliver explains.

He says that with the recent downturn in the financial markets, “the baby boomers have now seen how quickly a lot of their wealth could disappear.”

Oliver says that people are asking if their trusts should provide benefits to spouses in addition to their children. “The classic model was an irrevocable trust that never provided any benefits except for the children,” he says. “But now you’re seeing a lot more people looking at it and reviewing it.”

Rathbun says that these issues can be addressed by changing the funding strategy of those trusts. “There are two aspects to trusts,” he says. “One is creating the trust and all its provisions, and the second is funding it.

“If we had these elaborate irrevocable trusts and they’re not funded, it really didn’t hurt us,” says Rathbun.

He explains, “The marital trust, the A-B trust, most of those aren’t funded until the first death. As long as those people are still alive, you can change the funding.”

Rathbun explains that in a situation where an irrevocable trust was funded, clients may have some problems. “If it’s an irrevocable trust and part of the estate plan, irrevocable is still irrevocable. We can minimize funding and maximize the outflow to try to get rid of it,” he says.

“Lets say you were worth $2 million and you set up a $500,000 irrevocable trust, and funded it with $500,000–then you may need some creative attorneys,” he says.

Rathbun states that most attorneys will not fund an irrevocable trust until the first death. “That’s why we have the living trust, and the living trust becomes irrevocable at your death.

“It’s rare that an irrevocable trust gets funded when both spouses are alive, and if it does get funded while they’re both alive, there’s other reasons besides taxes,” says Rathbun.

Trust planning can provide a whole host of additional benefits to clients, outside of tax planning, says Oliver.

“Part of our job is to help explain that estate planning goes beyond just doing tax planning–it takes into account creditor protection, and protection for the spouse and kids,” he says.

“Maybe five or six years ago estate plans were put into place motivated primarily by taxes–I think now people take a broader look at it,” he says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, March 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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