Flexibility In Estate Planning Is More Important Than Ever

Every once in awhile, we’re faced with married clients who most likely need an AB Trust or Credit Shelter Trust, but who are hesitant to establish one. Why? They’re afraid that, at the death of the first spouse, the terms of the trust will obligate the survivor to set up a Family Trust that proves unnecessary. And, there may be circumstances when this requirement would be unnecessary, particularly in light of the estate tax provisions of the Tax Relief Act of 2010 (TRA 2010).

For example, what if both spouses pass away before 2013, and they end up exempt from estate tax under TRA 2010? Or, what if Congress springs to action in 2012 and permanently extends the current estate tax provisions?

Unfortunately, there are plenty of “what ifs” on the other side of those arguments. Such as, what if the second spouse dies in 2013, and the current estate tax provisions have been allowed to sunset? With substantial assets and no AB Trust, the second spouse’s estate may be subject to taxes that could otherwise have been avoided. What if the surviving spouse has remarries and subsequently divorces? With no AB Trust, the assets might have become marital property in the second marriage and subject to division in the divorce action.

Without a crystal ball, it’s impossible to know for sure what a family’s circumstances – let alone the status of the law – will be when the first spouse passes away.

One solution that adds flexibility to an estate plan is the “Flex Trust.” This option is particularly attractive if you have clients who are on the fence about opting for AB Trust planning. Under this arrangement, when the trust is created, the clients select a trusted person or “special co-trustee” – an independent third party other than a beneficiary or the surviving spouse. At the time of the first spouse’s death, this “special co-trustee” decides how much to put in the Family Trust, if any. This allows the flexibility to fund the Family trust without being required to do so, if the circumstances don’t warrant it at the time.

This option might be appropriate in most situations, for instance, when your clients are in a long-term marriage, and have no children other than those born of that marriage.

However, a Flex Trust would not be appropriate when the client has a stated goal of protecting beneficiaries other than his or her spouse. In that situation, under the Flex Trust the trusted independent person could send all of the assets to the surviving spouse, who might choose different ultimate beneficiaries than the deceased spouse’s children. If the client is concerned about concretely providing for the ultimate disposition of the assets, then a standard AB Trust would be the way to go.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd., Ste. 240
San Diego, CA 92124
(800) 846-1555
www.aaepa.com