July 2001
Estate Tax Changes: Are Trusts Still Needed?

The new tax law passed by Congress includes many changes to our existing Tax Code. Some of the changes lower the personal income tax rates over many years.

In addition, a series of changes were made to our Estate Tax Laws. In particular, all estate taxes are to be repealed in 2010, or in just 9 years from now.

These changes will have a profound impact on estate planning, much of which has been geared toward saving estate taxes. Without these taxes, every estate plan, including Wills and Trusts, should be reviewed and perhaps modified.

Although estate taxes will no longer affect your estates in 9 years, the changes are being phased in over that period. This means that the current $675,000 exemption will increase to $1,000,000 in 2002. For 2004, the exclusion will be $1,500,000, and it will be $2,000,000 in 2006 and $3,500,000 in 2009.

With this increase in the lifetime exemption amount, your estate in 2002 would have to exceed $1,000,000 before any federal estate taxes would be due. By 2004, your estate would have to be greater than $1,500,000 before you would have to pay any estate taxes.

While the exemption is being increased, the tax rates will be substantially reduced. The net result for you is lower or no estate taxes.

Since the estate taxes, or “death taxes,”are being reduced and eventually being phased out, the trust you may have created will have little or no value in saving taxes. For those of you who have not yet established a trust, you may want to avoid the expense of creating a trust.

You may have seen advertisements or flyers in your newspapers touting the virtues of trusts. Those ads generally suggest that you should form a trust to avoid estate taxes. They also promote fear of Probate, suggesting that Probate is expensive, time consuming, and something that should be avoided like the plague. All of which are untrue. I call those persons who attempt to scare you into buying a trust, “Fear Mongers.”

But Probate is most often quick and inexpensive. If you have a Will, and if those named in the Will live nearby, the Probate Court will probate your Will and appoint your Personal Representative in a single day! The costs would likely be in the $1,200 to $1,400 range. That is all. If those named in the Will do not live nearby, the same action will be concluded within about 2-3 weeks.

Since estate taxes will no longer be a reason for creating a trust, and since Probate is relatively quick, easy, and inexpensive, why have a trust? Trusts are generally expensive and require holding title to your home and bank and investment accounts in the name of your trust. Transferring title is somewhat expensive and a hassle.

Nonetheless, there may be valid reasons for creating a trust. For example, assume that you are married and you and your current spouse have children from different marriages. Also assume that after the death of your spouse, you want a greater portion of your estate to pass to your children rather than to your spouse’s children.

A trust is the only way to ensure that your intentions will be fulfilled. The reason is simple. If you have a simple Will that passes all your property to your spouse, which is customary, your spouse could subsequently change her Will to defeat the distribution to your children.

That is, with a Will, you must rely on your spouse to fulfill your intentions. With a Trust, you control how your estate will be distributed after the death of your spouse.

You may also want to create an irrevocable trust into which you place certain assets. Such a trust may be for the purpose of keeping those assets out of reach of creditors or Medicaid. For Medicaid purposes, you must transfer such assets at least 60 months prior to applying for Medicaid.

And there may be other purposes for establishing such an irrevocable trust. To help you decide whether a Will or a trust best meets or your needs, you should contact an Elder Law Attorney. To locate an Elder Law Attorney, check with the National Academy of Elder Law Attorneys at (520) 881-4005, or your local Yellow Pages.

YOUR QUESTIONS: Do you have a particular question that you would like answered? To better serve the readers of the Utah Spirit, please direct your questions in writing to Michael A. Jensen, Elder Law Attorney, PO Box 571708, Salt Lake City, Utah 84157-1708, or by e-mail at: mike-spirit@utahattorney.com. From time to time, I will attempt to answer some of those questions.