Trusts and Estate Taxes

[veeceeone]

I hope that this post is not "too much in the weeds".

My and my wife's combined assets are definitely far below the expected 2026 estate tax exemption limit of $5 million. I just want to make sure that my heirs do all the right paperwork when we die.

We have a joint revocable trust. I do not have a good relationship with the lawyer who created the trust--he doesn't want to explain anything.

When the first of us dies, one of the following should happen, according to our trust terms:

. A Marital Trust and a Bypass Trust should be created

. A Survivor's Trust should be created

Since our assets are below the expected limit, the reasonable thing to do is creating the Survivor's Trust--it is a whole lot simpler.

There is a "test" in the trust document to decide which of the above two should be done. The test compares our combined total assets to the limit for a single person (namely $5 million). Even by this test, the decision should be to create the Survivor's Trust,

What surprises me is testing our combined total assets to the limit instead of testing the assets of the person who passed away--for the sake of simplicity, let's assume that it is 50% of the combined total assets.

This has made me lose confidence in the trust itself.

I hope that I am making sense. If not, please ask questions and I will try to explain better.

Thanks.

[toddthebod]

I hope that this post is not "too much in the weeds".

My and my wife's combined assets are definitely far below the expected 2026 estate tax exemption limit of $5 million. I just want to make sure that my heirs do all the right paperwork when we die.

We have a joint revocable trust. I do not have a good relationship with the lawyer who created the trust--he doesn't want to explain anything.

When the first of us dies, one of the following should happen, according to our trust terms:

. A Marital Trust and a Bypass Trust should be created

. A Survivor's Trust should be created

Since our assets are below the expected limit, the reasonable thing to do is creating the Survivor's Trust--it is a whole lot simpler.

There is a "test" in the trust document to decide which of the above two should be done. The test compares our combined total assets to the limit for a single person (namely $5 million). Even by this test, the decision should be to create the Survivor's Trust,

What surprises me is testing our combined total assets to the limit instead of testing the assets of the person who passed away--for the sake of simplicity, let's assume that it is 50% of the combined total assets.

This has made me lose confidence in the trust itself.

I hope that I am making sense. If not, please ask questions and I will try to explain better.

Thanks.

What state do you live in? Survivor and bypass trusts are not typically used for federal estate tax avoidance any more.

As far as your specific question, of course you would want to test against combined assets. The purpose of the bypass trust is to reduce estate taxes for the surviving spouse. The number you care about is the size of the surviving spouse's estate after the first spouse dies.

(Also, the expected estate tax limit will be about $7M per person.)

[veeceeone]

I live in North Carolina.

Survivor and bypass trusts are not typically used for federal estate tax avoidance any more.

Did you mean "marital and bypass trusts"?

As far as your specific question, of course you would want to test against combined assets. The purpose of the bypass trust is to reduce estate taxes for the surviving spouse. The number you care about is the size of the surviving spouse's estate after the first spouse dies.

Let me think about this, especially after getting more sleep. What you have answered addresses the crux of my post. Thanks.

(Also, the expected estate tax limit will be about $7M per person.)

(I was being super conservative and picked a low number.)

[bsteiner]

I hope that this post is not "too much in the weeds".

My and my wife's combined assets are definitely far below the expected 2026 estate tax exemption limit of $5 million. I just want to make sure that my heirs do all the right paperwork when we die.

We have a joint revocable trust. I do not have a good relationship with the lawyer who created the trust--he doesn't want to explain anything.

When the first of us dies, one of the following should happen, according to our trust terms:

. A Marital Trust and a Bypass Trust should be created

. A Survivor's Trust should be created

Since our assets are below the expected limit, the reasonable thing to do is creating the Survivor's Trust--it is a whole lot simpler.

There is a "test" in the trust document to decide which of the above two should be done. The test compares our combined total assets to the limit for a single person (namely $5 million). Even by this test, the decision should be to create the Survivor's Trust,

What surprises me is testing our combined total assets to the limit instead of testing the assets of the person who passed away--for the sake of simplicity, let's assume that it is 50% of the combined total assets.

This has made me lose confidence in the trust itself.

I hope that I am making sense. If not, please ask questions and I will try to explain better.
...

If you were in a common law state and you were concerned about estate tax, you might have a Will in which you leave the estate tax exclusion amount (or your entire estate if it's less than that) to a trust that won't be included in your spouse's estate. That trust would be called the credit shelter trust, bypass trust, or family trust. You would then leave the excess either to your spouse outright, or to a marital (QTIP) trust that would be treated for estate tax purposes as if it went to your spouse outright.

If you were in a common law state and you weren't sure whether the estate tax would be relevant, you could leave your estate to your spouse (or to a marital trust), and say that to the extent your spouse disclaims, the disclaimed property will go to a disclaimer trust. A disclaimer trust is essentially a credit shelter (bypass) trust, except the spouse would have a lesser degree of control over it.

In a community property state (especially California since that's the largest by population and the one where revocable trusts are commonly used), couples typically put their assets in a joint revocable trust. Upon S1's death, S1's assets (S1's separate property and S1's share of the community property) pass in one of the ways described above, except that anything that would otherwise go to the spouse outright is combined with S2's assets (S2's separate property and S2's share of the community property) in a trust that S2 may revoke. That trust is called a survivor's trust.

If your combined assets are far below $5 million, the estate tax is unlikely to be a concern, at least for now. You can leave your estate however you want, without regard to the estate tax, such as to your spouse outright (or added to the survivor's trust in California) (with a disclaimer trust as backup), to a credit shelter trust, or to a marital trust (to provide some protection and get another basis step-up at your spouse's death).

I can't tell from what you wrote what you have.

...
What state do you live in? Survivor and bypass trusts are not typically used for federal estate tax avoidance any more.
...

We use them for clients for whom the estate tax is a reasonable possibility. For others we usually include a disclaimer trust as a backup.

I live in North Carolina.
...

Did you move there from a community property state?

[veeceeone]

Did you move there from a community property state?

I moved from Indiana.

[veeceeone]

I can't tell from what you wrote what you have.

Do you still have a question?

We moved from Indiana to North Carolina. Our combined assets are far less than $5 million.

I didn't understand the other four paragraphs that you have written. Let me read them again.

Our marital trust is a QTIP trust. This surprised me to, since there are no prior marriages.

Thanks.

[bsteiner]

Did you move there from a community property state?

I moved from Indiana.

What you have is typical in California. We also create joint revocable trusts for people moving from a community property state to segregate their community property.

...
Our marital trust is a QTIP trust. This surprised me to, since there are no prior marriages.
...

As a practical matter, a marital trust has to be a QTIP trust. (There are a couple of other types of marital trusts but they're unusual.)

You could leave the marital share (the excess above the estate tax exclusion amount) to your spouse outright, or to a marital trust. You must have chosen to leave it in trust rather than outright.

Based on the assets you presently hold, since your estate is well below the estate tax exclusion amount, nothing would pass to the marital trust. However, if we're providing for a credit shelter (bypass) trust, we would have the excess above the estate tax exclusion amount go to the spouse or the marital trust in case it turns out that the client's estate is more than the estate tax exclusion amount.

[veeceeone]

You must have chosen to leave it in trust rather than outright

My attorney did NOT give me a chance to select anything. He just gave me his standard package.

[bsteiner]

You must have chosen to leave it in trust rather than outright

My attorney did NOT give me a chance to select anything. He just gave me his standard package.

That would be like a doctor who gives everyone the same prescription.

I would suggest that you seek competent trusts and estates counsel.

[veeceeone]

The purpose of the bypass trust is to reduce estate taxes for the surviving spouse. The number you care about is the size of the surviving spouse's estate after the first spouse dies.

So, if, for the sake of discussion, the combined assets are $8 million and the estate tax exemption amount is $5 million, $5 million will go into the bypass trust and $3 million will go into the marital trust?

If the idea is to minimize the size of the surviving spouse's estate after the first spouse dies, who don't we put all $8 million into the bypass trust? Are there any rules limiting it to the estate tax exemption amount of $5 million?

Thanks.

[veeceeone]

What is the difference between a marital share and a marital trust?

[veeceeone]

Also, my attorney solicited input from me on our situation. He just did not ask for my preferences on how I want done.

To stretch the medical analogy some more, he sought input on my symptoms and medical history. He did not ask me whether I wanted a cream or suppository in my medication.

[Jack FFR1846]

I have a question as the answer in my case had DW and me bail on all trusts altogether. Who is the trustee for each trust?

[bsteiner]

The purpose of the bypass trust is to reduce estate taxes for the surviving spouse. The number you care about is the size of the surviving spouse's estate after the first spouse dies.

So, if, for the sake of discussion, the combined assets are $8 million and the estate tax exemption amount is $5 million, $5 million will go into the bypass trust and $3 million will go into the marital trust?

If the idea is to minimize the size of the surviving spouse's estate after the first spouse dies, who don't we put all $8 million into the bypass trust? Are there any rules limiting it to the estate tax exemption amount of $5 million?

No. Only the assets of the first spouse to die are available for the bypass trust.

There were a few articles pro and con in the early 1990s on whether you could create a joint revocable trust in a common law state and use the same assets to fund the credit shelter trust regardless of which spouse died first. Paul Fletcher, a lawyer in Oregon, came up with the idea. At first, the IRS issued a few favorable rulings on it. But after the Tax Court decision in Estate of Kwang Lee, the IRS will no longer issue rulings on it, no one thinks it works, and between the increased level of the estate tax exclusion amount and portability, the issue is rarely relevant nowadays.

I had assumed that you ended up with a California type trust. Were you instead trying to accomplish this?

You can put more than the estate tax exclusion amount into the bypass trust but you would incur estate tax on the excess at the first spouse's death. Occasionally that's desired but not very often.

What is the difference between a marital share and a marital trust?

The marital share could be either outright or in a marital trust.

Also, my attorney solicited input from me on our situation. He just did not ask for my preferences on how I want done.

To stretch the medical analogy some more, he sought input on my symptoms and medical history. He did not ask me whether I wanted a cream or suppository in my medication.

He's supposed to make a recommendation based on your situation and your objectives.

From everything you've said, I still think the best thing would be to find a competent trusts and estates lawyer.

[GAAP]

Another reason for a bypass trust would be if you lived in a state with an estate tax that has a much lower exemption limit. However, neither Indiana nor North Carolina have estate taxes.

From what you've written so far, I think you used a trust-mill attorney. That "standard package" sounds like it is designed to increase the firm's revenue, not really caring about what the client needs.

Get competent legal advice.

[bsteiner]

Another reason for a bypass trust would be if you lived in a state with an estate tax that has a much lower exemption limit. However, neither Indiana nor North Carolina have estate taxes.

From what you've written so far, I think you used a trust-mill attorney. That "standard package" sounds like it is designed to increase the firm's revenue, not really caring about what the client needs.

Get competent legal advice.

That may explain how they ended up with a California type trust.

[veeceeone]

1. I (a North Carolina resident) may well have needlessly ended up with a California type trust created by a trust-mill attorney.

2. It has not been easy to find estate planning attorneys where I live. When I started the process, I contacted about six. None of them responded. I was happy when I finally found one that a relative has used. I will keep on looking for a competent one.

3. In the meantime, I want to understand the trust that I have and also concepts like bypass trust and marital trust.

4. A very specific question below:

We have a joint revocable trust. Let's say that our combined assets are $2 million. When the first person dies, can the entire $2 million be moved into a Bypass Trust or only the deceased spouse's share of it (which let us assume is $1 million)?

Thanks.

[bsteiner]

1. I (a North Carolina resident) may well have needlessly ended up with a California type trust created by a trust-mill attorney.

2. It has not been easy to find estate planning attorneys where I live. When I started the process, I contacted about six. None of them responded. I was happy when I finally found one that a relative has used. I will keep on looking for a competent one.

3. In the meantime, I want to understand the trust that I have and also concepts like bypass trust and marital trust.

4. A very specific question below:

We have a joint revocable trust. Let's say that our combined assets are $2 million. When the first person dies, can the entire $2 million be moved into a Bypass Trust or only the deceased spouse's share of it (which let us assume is $1 million)?
...

We've found it difficult to find good local counsel in North Carolina for trusts and estates matters, as have our clients in North Carolina. While it's a large state by population (about 10 million), there's no city with over 1 million population.

If your combined estates are $2 million, that might limit your choices.

There was some discussion in the early 1990s about creating a joint revocable trust in a common law state to use the same assets to fund the credit shelter (bypass) trust regardless of which spouse died first. That was an issue when the estate tax exclusion amount was $600,000, and most of the assets were retirement benefits, so you wanted to be able to use the nonretirement assets to fund the credit shelter trust regardless of which spouse died first. There were several articles pro and con on this, and for a while the IRS was issuing favorable private letter rulings on it. However, after the Tax Court decision in Estate of Kwang Lee, https://scholar.google.com/scholar_case ... _sdt=4,192, no one now thinks it works, and the IRS will no longer issue rulings on this.

Of course, what might happen with the deceased spouse's assets would depend on the terms of the trust.

[single2019]

I hope that this post is not "too much in the weeds".

My and my wife's combined assets are definitely far below the expected 2026 estate tax exemption limit of $5 million. I just want to make sure that my heirs do all the right paperwork when we die.

We have a joint revocable trust. I do not have a good relationship with the lawyer who created the trust--he doesn't want to explain anything.

When the first of us dies, one of the following should happen, according to our trust terms:

. A Marital Trust and a Bypass Trust should be created

. A Survivor's Trust should be created

Since our assets are below the expected limit, the reasonable thing to do is creating the Survivor's Trust--it is a whole lot simpler.

There is a "test" in the trust document to decide which of the above two should be done. The test compares our combined total assets to the limit for a single person (namely $5 million). Even by this test, the decision should be to create the Survivor's Trust,

What surprises me is testing our combined total assets to the limit instead of testing the assets of the person who passed away--for the sake of simplicity, let's assume that it is 50% of the combined total assets.

This has made me lose confidence in the trust itself.

I hope that I am making sense. If not, please ask questions and I will try to explain better.

Thanks.

In plain English (without using the word “trusts”), what are you trying to achieve?

[cheesepep]

As someone who also had a lawyer to do my trust and doesn't want to explain anything, I understand your situation.

[veeceeone]

In plain English (without using the word “trusts”), what are you trying to achieve?

1. I want our two children to get our assets when I and my wife die. The children are in their 30s now.

2. I want to possibly give one kid more than the other, depending on who spends more time taking care of us.

3. I want to minimize tax obligations on the children for the inherited money. (They shouldn't pay estate taxes. They should pay minimum on capital gains and such. In other words, they should get all the possible "steps up" in basis.)

4. Protecting our children's inherited money from creditors and divorce would be nice. This is not a high priority.
-------------------
[ Thanks for asking this question. In software projects, we often ask the customer, "What problem are you trying to solve?"]

[veeceeone]

If your combined estates are $2 million, that might limit your choices.

There was some discussion in the early 1990s about creating a joint revocable trust in a common law state to use the same assets to fund the credit shelter (bypass) trust regardless of which spouse died first. That was an issue when the estate tax exclusion amount was $600,000, and most of the assets were retirement benefits, so you wanted to be able to use the nonretirement assets to fund the credit shelter trust regardless of which spouse died first. There were several articles pro and con on this, and for a while the IRS was issuing favorable private letter rulings on it. However, after the Tax Court decision in Estate of Kwang Lee, https://scholar.google.com/scholar_case ... _sdt=4,192, no one now thinks it works, and the IRS will no longer issue rulings on this.

Of course, what might happen with the deceased spouse's assets would depend on the terms of the trust.

1. Is North Carolina a common law state?

2. When the first spouse dies, will we be OK if we used his share of the assets in the joint recoverable trust (50% of the non-retirement assets in the joint recoverable trust and his retirement assets) to fund the credit shelter trust?

3. More basically, should we just revoke the trust and go for a Pay-on-death / Transfer-on-death solution? [ I am not quite ready yet for this "nuclear option". ]

[bsteiner]

...

1. Is North Carolina a common law state?

2. When the first spouse dies, will we be OK if we used his share of the assets in the joint recoverable trust (50% of the non-retirement assets in the joint recoverable trust and his retirement assets) to fund the credit shelter trust?

3. More basically, should we just revoke the trust and go for a Pay-on-death / Transfer-on-death solution? [ I am not quite ready yet for this "nuclear option". ]

1. Yes. North Carolina is a common law state (one that's not a community property state).

2. That depends on what it says.

3. Without seeing what the trust says and knowing whether it does what you want, we can't say whether you should revoke it and do new Wills (or new revocable trusts if you want them). But if the lawyer didn't ask you what you want, there's a chance that it might not do what you want.

It's generally not a good idea to name beneficiaries for taxable accounts (assets other than life insurance and retirement benefits), for many reasons. But if your estate is modest size, you don't want a credit shelter trust at the first spouse's death, and you're not concerned about estate taxes in your children's estates or protection against their creditors and spouses, and they're unlikely to want Medicaid (in other words, if they'll be too rich to get Medicaid but too poor to pay estate tax), it might not cause any problems. You would have to make sure to revise the plan if a child were to predecease you.

[single2019]

In plain English (without using the word “trusts”), what are you trying to achieve?

1. I want our two children to get our assets when I and my wife die. The children are in their 30s now.

2. I want to possibly give one kid more than the other, depending on who spends more time taking care of us.

3. I want to minimize tax obligations on the children for the inherited money. (They shouldn't pay estate taxes. They should pay minimum on capital gains and such. In other words, they should get all the possible "steps up" in basis.)

4. Protecting our children's inherited money from creditors and divorce would be nice. This is not a high priority.
-------------------
[ Thanks for asking this question. In software projects, we often ask the customer, "What problem are you trying to solve?"]

A life in managing software has trained me to ask that question

Given the size of your estate, grownup children, and the absence of any estate taxes in NC, I claim that all 4 of these objectives can be met by proper wills (and testaments) for you and spouse. A revocable trust is not necessary.

[veeceeone]

Thanks.

[cacophony]

My and my wife's combined assets are definitely far below the expected 2026 estate tax exemption limit of $5 million.

My understanding is that in 2026 the exclusion amount is going down to $5M, indexed to inflation, which means it will be around $7M. And that's $7M per person, so a couple would have $14M.

[veeceeone]

It's generally not a good idea to name beneficiaries for taxable accounts (assets other than life insurance and retirement benefits), for many reasons.

What are these reasons?

Thanks.

[toddthebod]

It's generally not a good idea to name beneficiaries for taxable accounts (assets other than life insurance and retirement benefits), for many reasons.

What are these reasons?

Thanks.

Hopefully I'll save him having to answer this question again!

viewtopic.php?p=7982575#p7982575

[veeceeone]

viewtopic.php?p=7982575#p7982575

Thanks for the link. I will definitely read that.