Besides the weird effect on capital gains tax which the unintended estate tax repeal for 2010 had (see my referral to a NYT-article) the estate tax repeal has some other unexpected implications on living trusts.
Some living trusts are set up as a so called "bypass-trusts". Those trusts generally have multiple beneficiaries: the spouse, children and sometimes others which are supposed to inherit the trust property. One essential clause usually states in legalese: I want the amount that will not create any federal estate tax to go to my kids. I want everything else to go to my spouse. Such a clause formerly avoided a maximum in estate tax.
Now without a federal estate tax the basis for such a clause falls apart if one spouse dies in 2010. If read literally, the clause now states that every single asset of the trust will go to the kids (because there is no federal estate tax at all). The spouse would not receive anything!
Naturally if the couple was very wealthy the spouses would have intended otherwise. Before 2010 with such a clause in place, the surviving spouse would have got a significant share of the estate that ensured his or hers financial independency. Now the surviving spouse has every reason to challenge the trust on the basis that it did not reflect the true will of the grantors. In the end (after a long battle in court) a judge would have to decide. Havoc!
If your estate plan contains such a clause, it is time to see your local estate planning specialist who will be able to change it. If you have further questions about updating your estate plan according to the new situation in 2010 please contact our office at 1-800-303-2964. I am located at 1990 North California Blvd., Walnut Creek, California 94596. I have additional offices in Fairfield, Oakland, and Sacramento. I offer free initial consultations. For further reference see my website (www.rinnelaw.com).
