In my previous blog we looked at harnessing the power of a QTIP (qualified terminable interest property) trust for passing wealth to your spouse and children. However, if you've been married more than once, especially if you have children from different marriages, your estate plan should be even more carefully reviewed to avoid a trap where you could unintentionally shortchange your current spouse.
Consider this scenario:
The Tax Cuts and Jobs Act (TCJA) retained the federal estate, gift, and generation-skipping transfer (GST) taxes but doubled the federal exemption amount to $11,180,000 per taxpayer through December 31, 2025 (indexed for inflation). But, unintended consequences of this temporary doubling of the exemption may be seen in wills containing “formula” based trusts which automatically adjust for the changes in the exemption.
An individual has an estate valued at approximately $11,000,000. His current will distributes an amount equal to his unused federal exemption to a bypass trust for the benefit of his three children from a prior marriage, and the remaining balance of his estate is directed to be distributed to a marital trust for the benefit of his current spouse. Under the new law, including the doubled exemption amount, his current will would cause his entire estate to be distributed to the bypass trust (assuming he has made no lifetime gifts), leaving nothing to be distributed to the marital trust for the benefit of his current spouse.
As this scenario demonstrates, no plan should ever be set in stone. As tax law changes — and the TCJA is the most far reaching change in tax law since 1986 – your will, trust documents, and other long-range financial plans should be revisited in light of new law as well as changes in your family circumstances such as births, deaths, divorces, and marriages.
If you have questions about your current estate plan or need to begin the process, we can help. You can reach me at SDitman@BerdonLLP.com or contact to your Berdon advisor.
Scott T. Ditman, CPA/PFS, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.