The combination of reduced asset values and the increase in the estate tax exemption between 2008 and 2009 has created a situation in which the “Law of Unintended Consequences” may cause devestating consequences for the surviving spouse.
Assume that in 2008, a married couple had a net worth of $10M and instituted a very common estate plan, wherein at the death of the first spouse the then applicable estate tax exemption amount ($2M in 2008) is allocated to the children or a trust established for their benefit (the “Bypass Trust” as it is sometimes called). Under this estate plan, the balance of the estate is allocated to a trust for the surviving spouse. At that time, the net result of such a plan is as follows: If the husband had died in 2008, the children (or their trust) would have received $2M and the wife (or her trust) would have received $8M, which would have achieved the result the couple desired (see left side of the illustration below).
BUT, WHAT IF NEITHER SPOUSE DIED IN 2008…
Assume that in 2009, due to the economic downturn, the estate assets decreased to $6M, while the estate tax exemption amount increased to $3.5M. If the couple did not visit their estate planning attorney to review their plan in light of these changes, then their plan will very likely lead to unintended consequences. Note the result if the husband dies in 2009 (or later) without the plan having been updated:
With a $6M estate, the estate tax exemption amount of $3.5M passes to the children (or their trust, i.e. the Bypass Trust), while the balance of $2.5M passes to the wife (or her trust). As is reflected in the right side of the illustration, the wife’s share has been reduced from $8M to $2.5M, due to lower asset values and the increase in the estate tax exemption amount.
This result could not be what this family intended, but this is exactly what would happen if the estate planning documents are not reviewed and amended to reflect the changes in asset values and the estate tax exemption amount.
LESSON LEARNED
It is important to have your estate planning documents reviewed by your attorney every year to ensure you avoid potential unintended consequences like those described above.
If you would like to make an appointment and have our firm review your estate planning documents, please contact me at your convenience.
About the Author: Jeffrey M. Verdon is an estate/income tax planning and asset protection planning attorney with offices in Irvine, CA and Las Vegas, NV. He can be contacted at (702) 341-6009 Ext 1, or via email at jeff@jmvlaw.com.