Does That Trust Need a Tune-Up?

Revocable trust plans have been around for fifty years or more. Revocable trusts were quite the rage when we began practicing law in the early 1990s. Most people wanted the privacy advantage that revocable trusts held over last wills and testaments. Some people believed mistakenly that revocable trusts would also provide better "death tax" protection than wills. Many of those revocable trusts served their purposes of the time, but tax laws have changed, other issues have become more important, and those old trust protections can create new problems today.

The tax issues that that our clients feared in the early 1990s were serious. The top federal estate and gift tax rate was more than 50% and an estate could only claim a $600,000 exemption (many farms and retirement plans were more valuable than $600,000). Additionally, the largest non-spousal Indiana inheritance tax exemption value was only $10,000 per child or grandchild.

Estate planning attorneys usually advised married clients to limit "death tax" liability in those days by making a separate trust for each spouse. When one spouse died, his or her share of the couple's assets would remain in a trust for the surviving spouse's benefit, but harsh restrictions prevented the surviving spouse from gaining unlimited access to the trust assets. Those arrangements were possible with revocable trusts (sometimes called "Living Trusts") or complex last wills and testaments.

The federal estate tax exemption rose to $5.45 million in 2016 and Indiana repealed the inheritance tax in 2013. Wealthy folks still need tax planning to avoid or minimize taxation if their wealth exceeds $5.45 million, but most people have more modest wealth and do not need such restrictive estate plans. Unfortunately, many people still have estate plans designed to fight taxes that no longer threaten their wealth.

One of the problems with the old "death tax" avoidance trusts pops up when a surviving spouse needs nursing home care. Federal law says assets in a deceased spouse's old revocable trust count as the surviving spouse's assets for Medicaid nursing home benefit eligibility purposes regardless of trust provisions that restrict the surviving spouse's access to the assets. For some reason, however, Congress did not apply that same treatment to assets in an equally restrictive trust established in a deceased spouse's last will and testament. This federal discrimination against revocable trusts punishes surviving spouses by disqualifying them for Medicaid assistance to pay nursing home costs even though they may have spent their own assets to zero and cannot access their deceased spouses' revocable trusts.

We advise people to review their estate plans at least every 5 years with an experienced trust and estate lawyer with a strong elder law background to ensure that the plans still work well under current laws and financial circumstances. Those people who made estate plans with wealth greater than $500,000 in the 1990s or more than $1 million in the early 2000s probably have unnecessarily restrictive trusts today. It is easy to update an outdated estate plan while you are healthy, but your plan may torture your surviving spouse if you fail to fix it before you die.

Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and was the 2014-15 President of the Indiana State Bar Association.

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