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Financial Planning > Trusts and Estates > Trust Planning

After EGTRRA, Clients With Trusts Need Revisiting

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After EGTRRA, Clients With Trusts Need Revisiting


Planners and advisors are using the tax bill passed last year as their calling card to revisit clients with trusts and financial plans already in place. Their first job, these advisors are finding, is educating clients about what the law does and does not do.

“There’s tremendous misinformation, or lack of knowledge of the new tax law,” says Gary Flotron, CLU, ChFC, AEP, a principal at G.L. Flotron and Associates, St. Louis, Mo.

“Everybody seems to think it really did the full repeal of estate taxes, and when you explain the sunset provision, they’re all shocked,” he says.

Most planners agree that the public has a misperception of estate tax repeal as an end to estate tax planning. The fact is, these planners agree, the changes made under the Economic Growth and Tax Relief Reconciliation Act of 2001 require updates to existing financial plans, and more flexibility in new plans.

“We suggest they revisit their wills and go visit their attorney to make sure they make all the necessary corrections,” Flotron says.

The trust planning that was in place prior to EGTRRA may no longer be appropriate for someone’s estate, says John Oliver, CLU, ChFC, vice president of strategic marketing services for Transamerica Occidental Life, Los Angeles, Cal.

“Go back and visit with clients, see how much you want to leave in that credit shelter trust at the first death,” he says.

Most credit shelter trusts use a calculation based on the current available exclusion amount, says Oliver.

“You may be leaving more in the bypass than you really wanted to,” he says.

Gary Rathbun agrees. “There’s no question, everybody who has done estate planning has to revisit their trust documents.”

Rathbun, who is president of Private Wealth Consultants, Toledo, Ohio, feels that even though the changes have a bigger impact on clients with smaller estates (less than $2 million), it is a good idea to continuously review an estate plan.

“If the estate laws stayed static, every 2 or 3 years you’d have to revisit your documents anyway, because your life doesn’t stay static,” says Rathbun.

“It’s just prudent to revisit all your documents anyway; this has given us all an opportunity as advisors to initiate that revisiting,” he says.

Bill Buxbaum, AEP, CLU, ChFC, a partner and estate planning specialist with Bay Financial Associates, LLC., Waltham, Mass., explains the situation with older estate plans. “If someone had a $1.5 million estate with a typical A-B trust, before the $1 million exemption we had a $600,000 exemption, so a $1.5 million client dies and $600,000 goes into the bypass trust and $900,000 goes to the spouse. Now with a $1 million exemption, if you’re not careful, $1 million goes to the bypass trust and only $500,000 goes outright to the spouse.”

Buxbaum explains that on a $1 million estate, failure to make this change could totally disinherit the spouse.

When working with clients with estates of this size, planners may want to revisit the original estate plan to see if it even makes sense to have a lot of complex trust planning, says Flotron.

“How sophisticated of a plan do we really need now?” he asks.

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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