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

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Older estate plans for “Leave it to Beaver couples” may have been, at one time, the state of the art for couples that have been “long-married with no step-kids.” But since the tax law changes effective in 2011 lifted the estate tax exemption to $5 million per spouse or $10 million per married couple, couples who leave their will and trust situation as it was may tie up much more money in trusts—or taxes—than intended, says James Lange, a CPA, estate planning attorney and president of the registered investment advisor (RIA) Lange Financial Group, LLC.

The “average client with an estate of between $500,000 to $1million or $2 million,” Lange (left), told AdvisorOne in a phone interview Monday, would have had their estate plan structured with wills and trusts so the surviving spouse would have inherited assets in the amount of the exemption, say “$600,000 of a $1.2 million estate,” and the balance in a trust in order to provide “trust income for life.” The trust could be “invaded for health, maintenance or support reasons,” he says.

A Complex Formula—That Won’t Work Now

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)


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