In my last blog post I promised to give some concrete examples of why an updated trust is better than one that simply keeps the “status quo”. I will forgo the obvious examples such as inheriting money or growing your assets so that your original plan will no longer work. I’ll also skip over the obvious changes in family circumstances which make your existing plan unpalatable. These are reasons you already know. This blog post will concentrate instead on the not so obvious reasons to update.

One of the most important (and most common) reasons to update from your Chevrolet trust to a Cadillac trust is a second marriage. A subtle problem may exist when you are in a second marriage and plan to leave your assets to your surviving spouse to use, and then hope that spouse passes them along to your descendants.

A typical estate plan provides for the surviving spouse to be the income beneficiary of a credit shelter trust with the remainder passing to your children. If your estate exceeds the minimum estate tax exemption then the remainder passes to a marital deduction trust, either a limited access trust commonly called a QTIP or outright to the survivor’s trust, depending upon your family circumstances. However in many second marriages, the plan is for the amount that can pass without being subject to estate tax to pass directly to your descendants upon your death. This is fairly common when the spouse may be close in age to your children. Such plans usually satisfy the belief that it would be unfair to make your children wait for their inheritance, yet the inheritance is still shared between your spouse and your descendants.

The way most plans are written, the formula operates to leave as much to your descendants as will not increase the tax. When that number is $1,000,000, in a $2,000,000 estate the surviving spouse would get half and the descendants would share the other half. But as the exemption amount increased to 3.5 million dollars, the surviving spouse would get nothing – not the intended result. Now the reverse is true, this year there is no estate tax and that plan would completely disinherit the spouse no matter how large the estate, but next year, the descendants will share only 1 million dollars no matter how large the estate.

I believe in “modeling” or “back testing” the results to be sure you will achieve the desired result, and it pays to model or back test frequently if a sound estate plan is important to you.

Unintended consequences can arise in many ways, this is just one graphic example.

Call today and arrange for me to review your documents and back test them against your assets and your intentions. You will be glad you did!