From 1987 through 2003, the federal estate tax exemption amount was between $600,000 and $1,000,000. This prompted many people to create Irrevocable Trusts to hold life insurance, or other Irrevocable Trusts to hold appreciating assets. The purpose was to remove life insurance proceeds or to remove the appreciation of an asset (think Amazon or Alphabet stock) from one’s taxable estate.
However, the advent of “portability” – the ability to allow a surviving spouse to utilize your federal estate tax exemption and the increase of the personal exemption to $10,000,000 (adjusted for inflation) gives reason to look at these Irrevocable Trusts and re-examine the reasons to maintain them.
The “cost” of maintaining an Irrevocable Trust is the annual Trustee’s fees and the fiduciary income tax returns. These annual costs can be quite substantial. Additionally, the creator of the trust (the Grantor) typically makes a gift transfer to the trust in order to cover any premium for life insurance owned by the trust. If there is no taxable estate (and for married couples in 2018, one would have to have an estate over $22,360,000 to be taxable) it becomes less attractive to maintain these trusts and incur the annual costs.
Fortunately, the Virginia Uniform Trust Code gives us several ways to revoke, amend or fix these Irrevocable Trusts. The techniques range from agreements between the beneficiaries, Trustee and Grantors (Non-Judicial Settlement Agreements, court approved modifications or terminations, or even “decanting” the Trust to a new trust with different terms or provisions.
For people who have created Irrevocable Trusts in the past 20 years, it makes sense to review the need for these trusts with your estate planning attorney. There may be ways to recapture a portion of the money invested or simply end the need to pay further into the Trust. There is no “one size fits all” solution, so professional advice is a must.