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Tax-tied trust glitch highlights need to review estate plans

Kent readers who have tuned in to recent discussions about the importance of regularly reviewing estate plans may be interested in a story that provides a clear example of how the failure to keep a plan current can lead to divisive probate litigation between family members. This unfortunate story involves a family that built a healthy retail business and parlayed it into a $100 million estate through a sale to a major electronics chain.

In 2008, the entrepreneurial husband and wife established a commonly used trust arrangement that would pass the assets of the first deceased spouse into trusts for their children up to the limit of the annual inheritance tax exemption. Any amount beyond the exemption would pass into a marital trust for the surviving spouse and inheritance taxes would be deferred until that spouse's death.

In 2010, the only year in recent history in which federal law abolished the inheritance tax entirely, the wife's health took a serious turn. Under the original trust agreement, the wife's death in 2010 would have meant that her share of the family fortune would pass entirely into the children's trust, leaving nothing for the husband's marital trust.

Less than two weeks before the wife's death in 2010, she signed an amendment that transferred her entire marital share of the family fortune directly into her husband's trust and placed nothing in trust for the children. After the wife's death, her two daughters filed suit alleging that the husband exercised undue influence in their mother's weakened condition to convince her to amend the trusts in his favor.

The daughters contend that their mother knew about the inheritance tax exemption and fully intended that her entire fortune should pass tax-free to her children. Attorneys for the husband say that his wife did exactly what she intended to do when she signed the trust amendment. An estate planning attorney says that if the couple had reviewed their plans in 2009 or early 2010, they could have made their intentions perfectly clear and avoided a costly battle over estate administration.

Source: Financial Planning Magazine, "Family Feud: Review Estate Plans Annually," Ann Marsh, Sept. 1, 2012

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