Warning: Older Living Trusts May Need To Be Revised

[This article was originally published on February 11, 2005.  The links were updated on June 13, 2018.]

Due to estate tax law changes, married couples who have created "living" trusts that split into sub-trusts upon the death of the first spouse should have their trusts reviewed, California ElderLawAnswers member attorney Gene Osofsky warns in an article on the California State Page.

Many couples created revocable "living" trusts before the 2001 changes in the tax law, which increased the personal estate tax exemption many-fold over what it was in earlier years. Just before the new law, the personal lifetime exemption was $675,000. For persons dying in years 2004 and 2005, the exemption has been increased to $1.5 million, and the amount of this exemption will rise still further during the remaining years of this decade. (For more on this, click here.)

Many of these older trusts contain directions to split the trust estate into mandatory sub-trusts upon the death of the first spouse. This mandatory split was usually designed to reduce or eliminate estate taxes over the span of the deaths of both the husband and wife in order to transmit the maximum gift to the couple's remainder beneficiaries, usually their children.

However, these trust provisions often still assume the existence of the older, lower exemption amount. In the current climate, these trust provisions may no longer be necessary and may well create unanticipated problems. For example, the surviving spouse's access to the trust assets may be restricted, securing a reverse mortgage or even a conventional mortgage may be impossible, and the allocation of a portion of the home to a trust may impair long-term care planning.

In some situations -- a second marriage, for example -- a sub-trust allocation devised under the old law could result in a lopsided allocation of assets to the surviving spouse, and perhaps even his or her partial disinheritance.

Attorney Osofsky recommends that married couples who created revocable living trusts prior to 2001, and many who created them after that date -- especially if the trusts were created by non-attorneys or by so-called trust mills (organizations marketing living trusts at discounted prices and typically prepared in standard formats with little regard for the clients' individual circumstances) - would be well advised to have their trusts reviewed by a competent professional.

To read Attorney Osofsky's full article, click here. (Note: although Attorney Osofsky refers to California's Medicaid program, called "Medi-Cal," his article is generally applicable to those in other states as well.)

To visit Attorney Osofsky's home page, click here.