As you may remember, last month we looked at Mrs. Smith, who came to see me for a very benign reason. Oh, what a difference THAT meeting made!
What began as a simple visit became quite rewarding once I showed her that we could modify her trust in a way that would save her children $300,000 in taxes! If you missed that post, you may want to circle back. Click here for Part 1 in the series.
If you are ready to pick up where we left off, let’s get going!
Credit Shelter Trust – A Sad Story with a Happy Ending
Back to the importance of updating your trust – let’s look at another case where making changes now could save your money from draining away!
Take this example: The client comes in to see me not long after his spouse is deceased. If he has not yet funded the Credit Shelter Trust, we may choose to use a Note Receivable to fund it, and keep all of the appreciated assets in the Survivor’s Trust. Remember that the Credit Shelter Trust is irrevocable, so this option does not work for everyone. The client may wish to make changes to the entire Trust, but that will not be possible if it is not modified by court action. Still, in some cases, this less expensive fix will work.
Mr. Jones came in to see me after Mrs. Jones died. She was a wonderful woman, and it was a devastating loss. He has a trust from 1995 that now splits into two trusts. His total estate is worth $5,000,000, and consists of stocks and bonds. Under the estate plan, the assets would be allocated $2,500,000 to the Survivor’s Trust, and $2,500,000 to the Credit Shelter Trust.
If this next part makes your brain hurt, just skip to the line in bold for the outcome and give me a call. I know, this can be mind-numbing stuff, just bear in mind that there really can be significant financial benefit to updating certain trusts. It’s well-worth a quick check.
Now, Mr. Jones is not interested in changing the trust. That said, he has the power to change the trustees of any trust or sub trust, and both trusts distribute to his eight children in equal shares. If one is not alive, that share distributes to that child’s children.
Therefore, he would like to just allocate $5,000,000 to the Survivor’s Trust, and sign a note payable to the Credit Shelter Trust. Principal and interest will be due at the death of the second spouse. There will be no taxable income.
Variation on a Theme
Changing the facts slightly: What if the trust provides that the successor Trustee would be Bank of America? Mr. Jones does not have the power to change the trustee of the Credit Shelter Trust. He wants to change the Trustee to his daughter, Pauline. What to do‽
Sidebar… Do you know about the “‽” interrobang? If not, I have a fun article for you to read next month. More on that later.
Okay, in this scenario, Mr. Jones wants to change the Trustee to his daughter, Pauline. How do we accomplish this? Well, we must modify the trust to allow him to make this change to the irrevocable Credit Shelter Trust. As you can see, the provisions of the older trusts will help us to decide if they need to be fixed and how to do so.
Still Have Questions?
If you are scratching your head, give me a call. The bottom line is that, if you have a trust drafted prior to 2012, you may have a MASSIVE HOLE in the bucket. Please be in touch, and let’s have a quick look to see if you do. Depending on what we find, you could put some serious cash in the pockets of your beneficiaries!
Never been to see me before? You are in luck! If you live in Los Gatos or surrounding area and have questions, you are in great company! I know this can feel overwhelming, and we have answers for you. If you would like to set up a time to talk with us at Brown Law Offices, please print out the certificate, good for a FREE 30-minute Legal Consultation, and call the office at 408-376-2755 to make an appointment.
This blog contains general information and is not meant to apply to a specific situation. Please seek advice of counsel before proceeding as each case is unique.