Marital Trusts: Deciding When to Update

January 29, 2018

In recent years, there have been significant estate tax changes in Wisconsin that may impact marital trusts. Married couples with an an older marital revocable trust are advised to have their trust reviewed. In this article, our estate planning attorneys explore why updating an older marital trust, more formally known as a marital revocable trust, maybe in a family’s best interest.

Older Marital Trusts Maybe Overly Complex

Many marital revocable trusts were set up to divide into two separate trusts when the first spouse passes away. This was a common best practice because the estate tax had been set low enough to impact many married couples.

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However, federal estate tax now impacts fewer people as the federal government increased the estate tax limit multiple times over the past two decades. Additionally, Wisconsin has eliminated its estate tax.

One of the ways to avoid the federal and Wisconsin estate tax was to fund a “credit shelter trust” upon the first spouse’s death. A “credit shelter trust” can be referred to by many names, including a marital trust, family trust, and an A/B trust. A “credit shelter trust” effectively doubled the amount that a married couple could pass estate tax free to their children or other beneficiaries. These trusts were set up to divide into two separate trusts upon the first spouse’s death. As discussed below, this division may no longer be in your family’s best interest.

Out-of-Date Revocable Trust: Detrimental to Your Goals?

Since most clients hire us to make things as easy as possible for their children or beneficiaries, an older complex “creditor shelter” revocable trust may no longer be wise. The federal estate tax has increased over eighteen times in the last two decades. Therefore, most couples and even individuals who may have been subject to paying estate taxes may no longer have to worry about avoiding estate tax.

As a result, many married couples have been left with overly complex, unnecessary marital trusts. These revocable trusts mandate the division of the couples assets into two trusts when the first spouse passes away. With the estate tax changes, this presents significant challenges as dividing these trusts is complicated and expensive.

706 tax form used with marital trustsDividing these type of trusts requires a lot of work and expense, including a complicated 706-estate tax return. The cost and time to divide these trusts into a survivor’s trust and into a “credit shelter trust” can often be avoided.

Moreover, upon the death of the first spouse, the credit shelter trust must file a separate income tax return every year that the surviving spouse is alive. This made sense when the estate tax was as high as 55% and applied to assets as low as $600,000. With the estate tax increasing so much, it’s often less advantageous for married couples to have a “credit shelter trust”.

Federal Estate Tax Law Reduces Need for a Complex Trust

Federal law now allows a spouse to double the amount sheltered from estate tax without the use of a trust. Called “spousal portability”, this new law allows a spouse to double the amount that can be sheltered estate tax free, even without a “credit shelter trust”. This new law further reduces the reasons for maintaining an older marital trust.

The Updated Revocable Trust

For many clients, the goal is to make things as easy and inexpensive as possible upon death. A revocable trust or joint revocable trust that does not split into two separate trusts when the first spouse dies can achieve that goal. If there are no significant reasons to split into separate trusts, then our estate planning lawyers can achieve simplicity and cost-effectiveness by updating or replacing an older marital revocable trust. We can also discuss possible advantages to retaining a more complex trust in certain situations.

We Have Updated Hundreds of Marital Trusts

Over the years, we have updated older marital trusts to help our clients take advantage of changes in tax and other laws. We have experience reviewing older trusts and recognizing when and how best to update. We can more accurately predict where updates, revisions, or new trusts will help our clients save time and money. If you have a marital trust over five years old, please contact us for an appointment to review and to discuss your planning needs.

Call us today on 262-658-2181

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This article is intended as general legal information and not as legal advice to any particular client, nor is it intended as advice on any particular issue or matter. If you have any questions regarding the subject matter of this article, or wish to discuss how the subject matter of this article may apply to your situation, please contact us.