How irrevocable is the so-called “irrevocable” trust? Many people are ready to find out as they consider changes to their trusts now that ATRA 2012 is in the mix.
Historically, irrevocable trusts have been pretty useful legal tools, especially for estate tax planning. While over time the trusts have changed very little, the same cannot be said for the estate tax laws. Now, and perhaps forever more if Congress doesn’t undo the American Taxpayer Relief Act of 2012 (ATRA), an individual can exempt $5.25 million from their estate or pass that exemption on to their spouse.
Back in the day, things were not always so generous. In 2001, for instance, the federal estate tax exemption for an individual was only $675,000. Many married couples created “bypass trusts,” which are “irrevocable” trusts established upon the death of the first spouse to preserve the deceased spouse’s estate tax exemption. Since many of the surviving spouses who are beneficiaries of these bypass trusts will have estates well below the current $5.25 million exemption, even counting the bypass trust asset values, some may want to consider revoking the bypass trusts so they can have full and unfettered access to the trust assets during their lifetime. Arguably, this could simplify life (and perhaps reduce trust-related expenses) for the surviving spouse.
Another form of irrevocable trusts was one established to own life insurance “outside” of the estate of the insured. These were established for a number of reasons, including providing estate liquidity for estate taxes and business succession planning. Again, if the primary motivation for creating these irrevocable trusts was estate tax driven (i.e., removing the life insurance amount from the estate of the deceased so as not to exceed the low tax exemption amount then in place), then perhaps revoking these trusts becomes an attractive option now that the exemption is higher.
So can you revoke an “irrevocable” trust? And if so, how??
Forbes recently considered these questions in an article aptly titled “How To Kill An Irrevocable Trust.” The original article speaks to some of the mechanics required to revoke the irrevocable.
One important question to consider: Even if you can, is it a good idea for you to kill your trust? That depends a great deal on the trust and on you, not to mention state law. Trusts can be such powerful devices that many are still choosing to create them, ATRA or not. If your trust serves other purposes in addition to federal estate tax minimization (for instance, protection against potential creditors or minimization of Pennsylvania state inheritance taxes), you should weigh the decision to revoke it carefully after consultation with your tax and legal advisors. In the end, it’s a cost-benefit analysis, so be sure to weigh both sides before you take action.
For more information about “irrevocable” trusts or for answers to your other estate planning questions, please contact us at Peak Legal Group to schedule a complimentary estate planning consultation.
Reference: Forbes (June 5, 2013) “How To Kill An Irrevocable Trust”