Skip to Content

Is there still a need for your Irrevocable Trust?
May 2018

May 31, 2018 | Families | Other | Today's Professionals


A common estate planning strategy for a married couple over the past few decades has been to minimize or avoid estate tax by using trusts to shelter an amount equal to the estate tax exemption. For example, a couple setting up their estate plan in 2000 with assets totaling $1,350,000 could have potentially saved over $200,000 in estate tax by funding an irrevocable trust upon the first death with $675,000 (the exemption amount in 2000), instead of having assets pass free of trust to the survivor. The irrevocable trust, often referred to as the Family Trust or the Credit Shelter Trust, typically pays income and discretionary trust principal to the surviving spouse. Upon the death of the surviving spouse, the remaining trust assets pass to the children estate tax free.

From 2000 to 2008, the federal estate tax exemption increased from $675,000 to $2,000,000 and most recently increased to $11,180,000. During the years with more modest exemption amounts, many irrevocable trusts were established to utilize the then existing exemption – and continue to exist today. These trusts require annual fiduciary income tax returns, typically have higher income tax rates than individuals, and upon the death of the survivor the trust investments do not receive a step-up in cost basis (meaning embedded capital gains are passed on to the remainder beneficiaries).

When the total assets of the surviving spouse plus the value of the irrevocable trust are less than both the state and federal estate tax exemption, there may no longer be a material purpose for the trust. (Caution: Vermont and some other states have estate tax exemption amounts significantly lower than the federal exemption.) Many states, including Vermont, allow for the termination of an irrevocable trust upon consent of all trust beneficiaries if the probate court concludes the continuance of the trust is not necessary to achieve any material purpose of the trust.

There are often important non-tax considerations that support continuing an irrevocable trust. However, when this is not the case it may be worth consulting with your attorney to see if an early termination makes sense.

 

IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Pathway Financial Advisors, LLC-“Pathway”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Pathway.  Please remember that if you are a Pathway client, it remains your responsibility to advise Pathway, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Pathway is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Pathway’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Pathway does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Pathway’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.