It’s a Trap! How to Avoid an Estate Plan Blunder and Big Taxes

The wording of the trust “didn’t say $600,000,” Lange explains—the estate planning attorneys used a complicated formula with “exemption amount in year of death” language to figure out exactly the amount to fund the trust with—and that, says Lange, is the problem. Because now with the much higher estate exemption of $5 million per person or $10 million per married couple, the “formula doesn’t work.” So a surviving spouse may end up with a much higher amount in a trust when it is now unnecessary to have that in a trust—the “trust is over-funded,” according to Lange. They “don’t need the trust in the first place,” now, Lange asserts.

Not only will the surviving spouse have “less discretionary income,” but if the “trust is the beneficiary of an IRA or retirement plan, massive income taxes are also triggered,” according a release from Lange.

Couples need to revisit their estate plan to ensure that they don’t get caught in this trap.

But what happens at the end of 2012, if the $5 million or $10 million exemption sunsets as planned in the legislation? Won’t that mean that families just have to do their trusts and wills all over again for the lower exemptions? Lange says there is a method he has trademarked, called the “Cascading Beneficiary Plan,” and he has written a book about it, called “Retire Secure,” (Wiley, 2006)