Dear Mr. Market:

On occasion you must certainly get writer’s cramp with all of your musings about the stock market. Allow us to not only give you a break this week but to also open your eyes to something outside of investments. All the attention you give your portfolio may be hampered if you neglect a few other issues. We’ve asked a guest and expert in estate planning to contribute some important information that you should be aware of:

Your living trust might be out-of-date.

Good financial planning isn’t just about stocks, bonds and other investments, it also involves looking at a client’s entire situation, encompassing family goals, tax planning and estate planning.  When My Portfolio Guide, LLC invited me to contribute an article, I jumped at the opportunity to collaborate with them because of their commitment to understanding all aspects of their clients’ lives when implementing strategies and solutions.

For those of you who have prepared a living trust, it is important to have your estate plan reviewed from time to time as things change.  As you are probably aware, new Federal and State laws are constantly being implemented, not to mention any changes that may be occurring in your personal life.  Because of the constant evolution of your personal situation and the legal landscape in general, I encourage my clients to occasionally review their living trusts and associated documents to make sure that everything is still going according to plan.

In particular, there has been one major change which I want to make you aware of.  Many people have created AB Trusts over the past two decades.  AB Trusts are designed to protect more of a married couple’s assets from being taxed by the government upon their passing.  However, one drawback of an AB Trust is that it is relatively expensive to implement after one spouse passes away.  The AB Trust requires that the trust be divided or “split” into two separate trusts after the first spouse passes away.  This split requires the help of an attorney or a CPA to divide and administer the trust and can also give legal rights to children or other beneficiaries over a portion of the trust during the lifetime of the surviving spouse, increasing the potential for conflict.  Furthermore, the split requires the filing of additional tax returns after the passing of the first spouse.  The costs associated with an AB split are often several thousands of dollars.

The AB Trust was very popular because it effectively doubled the amount a married couple could protect from the Federal Estate Taxes at death.  For those of you that are unfamiliar with the estate tax, it is a tax that the government places on your assets when you pass away.  The bad news is the tax rate is currently 40% which is quite high considering this tax is applied to assets on which income tax has already been paid.  The good news, however, is that the government allows each person an exemption which they can use to protect a certain amount of their assets from estate tax upon their passing.  In the 1990’s, that amount was, at one point, $600,000 per person, which meant that a person with a $1,000,000 estate could pass $600,000 to his loved ones free of estate taxes, while the remaining $400,000 would be taxable at the going rate (at that time, it was 55%).  Due to the Bush Era Tax Cuts and subsequent legislation, the current exemption amount is now approximately $5.3 million per spouse.  Given the large increase in the amount an individual can protect from government taxation at death, the AB Trust has become inappropriate for a significant segment of the population, as a single spouse’s exemption is now enough to protect the estates of most Americans.  The increase in the estate tax exemptions have greatly reduced the need for a second exemption to be preserved by the AB split.  As such, I encourage my clients to review their trusts and the various options available to them.  Doing so could mean saving a significant amount of time, effort, money and sleepless nights.

If you think you have an AB Trust, it is highly advisable that you speak with your estate attorney about whether or not this structure is still appropriate given your situation.  In addition, even if you do not have an AB trust, it’s a good idea to get into the habit of reviewing your estate plan with your attorney every 3 to 5 years to ensure that your plan is not adversely affected by other changes in the law or your personal situation.

Brian Y. Chou, Esq., MBA is an associate at the law firm of BarthCalderon, LLP in Orange, CA.  His practice is focused on estate planning, asset protection and business succession planning.