Laws change all the time, and this is especially true of estate and tax laws. An estate planning method that may have been at the leading edge at one time can become out of date or even illegal. Federal estate taxes, capital gains taxes and trusts have all changed over the years, and your estate plan needs to be reviewed on a regular basis to make sure it still works.
There was a time when irrevocable bypass trusts were highly favored by estate planning attorneys as one of the best estate planning methods for married couples. It worked like this: one spouse would fund the trust with an amount that was just under the estate tax exemption. At the time that the funding spouse passed away, funds in the trust were available for the heirs, and the balance of the estate was inherited by the surviving spouse.
Consequently, this approach lowered the size of the surviving spouse's eventual estate and lessened the estate tax burden for the married couple. However, as Kiplinger's Retirement Report points out in "Old Trusts Create Tax Issues for Heirs," estate tax laws have changed significantly since the time when many of these trusts were created.
The estate tax exemption is far higher than it used to be, and spousal portability now allows a married couple to double its estate tax exemption.
The problem for irrevocable bypass trusts is that assets in them do not receive the step up basis for purposes of the capital gains tax. What this means is that for many families, efforts to get around the old estate tax laws are actually creating a greater tax burden now and they would be better off without the bypass trusts entirely.
This is just one example of why it is important to review your estate plan with an attorney every few years. You want to make sure your estate plan is always ideal given the current estate laws, not older out of date laws that may not be relevant to your unique circumstances.
All that noted, every family situation is different. For example, in blended family situations, the irrevocable bypass trust may be the appropriate solution to avoid disinheriting your own children!
Make no estate plans or changes to your current estate planning without the prudent guidance of Robert A. Gordon of Redkey Gordon Law Corp, a qualified estate planning attorney.
Reference: Kiplinger's Retirement Report (October, 2015) "Old Trusts Create Tax Issues for Heirs"