Tax Cuts and Jobs Act Part II: Amending a Bypass Trust

Last month I began the year with a discussion of the new tax act: the estate tax exemption amount has doubled from 5.5 million dollars to 11 million dollars. Married couples may revisit their joint trusts that require a split of assets when the first spouse dies into an irrevocable “bypass trust” and a revocable “survivors trust.” In previous years these trusts were a common solution to the problem of reducing estate tax for married couples. As the amount you can leave “tax free” has grown, these trusts may not be necessary. I recommend a review of your trust or a discussion with your estate planning attorney about how your joint trust is structured.

What if you do have a trust with a bypass trust and it is no longer needed for tax purposes? Well, there could be non-tax reasons driving the choice, such as a wish to preserve assets for children of a prior marriage. But what if the main reason for funding the bypass trust was driven by a desire to save estate taxes?  Consider changing your joint trust to a simpler trust which would be easier to administer after the death of the first spouse. If your trust is still fully revocable you can simply amend or restate your trust.

But in my last column I posed the question: What if you and your spouse have a joint revocable trust but it can no longer be amended, either because your spouse has passed on or no s/he longer has capacity to sign an amendment. It can be a surprise for the surviving spouse to learn that s/he must now administer a deceased spouse’s share of the estate in an irrevocable trust-an entity with its own tax id number. Clients wonder: can I ignore this second trust? The answer is no, not if it is required under original trust.

It is possible to petition the court for a modification of the original trust document. The probate code allows the court to approve the modification of an irrevocable trust with the consent of all trust beneficiaries. The relevant code section has recently changed, effective Jan. 1st, 2018, in a way that could ease the requirements for such a petition under the probate code. Another option is to file a petition requesting a modification to the trust due to changed circumstances (such as a major overhaul of the tax code).

Call me if you wish to discuss modification of an irrevocable trust OR amendment of a revocable trust in light of recent changes to the tax code.