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California case causing estate planning attorneys to change approach to trust formulas, P.2

On Behalf of | Aug 8, 2012 | Inheritance And Estate Tax |

In our previous post, we began looking at a case in which a court ruled to be invalid a trust amendment executed shortly before the death of a woman. That trust setup, as we noted, contained a formula clause intended to utilize the full exclusion amount and minimize estate taxes.

Because of changes in the estate tax exclusion amount, the woman’s spouse was left with nothing at her death. The court did rule that the trust document didn’t reflect the intent of the deceased woman, and so sided with her widower, but his adult daughters apparently plan to appeal that ruling.

Experiences like this and ongoing changes in the estate tax system are prompting attorneys are increasingly moving away from using formula clauses. The potential consequences of a shift in the exclusion amount can have a dramatic effect on smaller estates, but can also affect large estate adversely as well. In either case, a surviving spouse can end up being disinherited or not having enough money to pay bills in retirement.

Attorneys are beginning to opt for the use of more flexible wording in place of formulas, and to revisit trust documents on a yearly basis, especially for larger estates.

At present, the estate tax exclusion amount is just over $5 million. That number is set to change back to $1 million in 2013, though, and the top tax rate is set to rise to 55 percent. Those with formula clauses in their trust documents will want to revisit those documents in preparation for the changes, and remain in close contact with their attorney, who will be tracking any forthcoming changes.

Source: CNBC.com, “Dramatic estate tax battle delivers fresh lessons,” July 31, 2012