Who remembers the Fiscal Cliff crisis of 2012? That crisis may be over and forgotten. However, changes to the estate tax laws enacted at that time are now beginning to affect middle class families and businesses.
In the simplest possible terms, the estate tax exemption was raised from $1 million to $5 million. So far so good, but perhaps not for everyone.
The problem lies in the fact that estate planning in the 1970’s through the 2000’s relied heavily on formulas tied to this exemption amount. These provisions are now obsolete, but the formulas are still firmly ensconced within thousands of Wills, and these folks are starting to pass away.
Here is an example. Let’s say Betty had a $4 million estate. If she died in 2003 and had a tax-planning Will, her husband Bob would likely get about $3 million, either outright or in a trust for his sole benefit. The other $1 million would go into a “family trust” that could provide extra income to Bob and to the children if needed.
If Betty died in 2014, though, the result would be completely different. Because the funding of the family trust is tied to the estate tax exemption, all $4 million of Betty’s estate would go into the family trust. There would be no marital trust for Bob.
This might still be okay if Bob was also the sole trustee of the family trust, and the children were not from a prior marriage, or otherwise antagonistic to Bob. In reality, though, estate planners usually put in multiple Trustees, meaning that Bob would need to go through someone else to access what was supposed to be his property. The children might also make matters worse, especially these days where people are living longer and getting remarried several times.
The final layer of complication comes in where the estate is made up of one or more family businesses. To continue our illustration, we will posit that the bulk of Betty’s $4 million net worth consisted of several businesses that she owned alone. Under the old law, the businesses would likely go into a marital trust solely for the benefit of Bob. Now, however, everything would be conveyed into a family trust where:
(a) The kids are also beneficiaries; and
(b) Bob will need the permission of one or more Trustees to get any income.
Bob might be all right if the kids and the trustees are cooperative. Still, what if the kids really want to control the businesses, or if they are Betty’s kids from a prior marriage? What if the trustees also have interests that are diametrically opposed to Bob’s?
Many businesses have suffered and declined when faced with an ownership split like this.
So what is the solution to this dilemma?
If both spouses are still alive, they can simply restate their Wills to eliminate the trusts. Most couples with less than $10 million should be able to avoid estate taxes without tying up their assets in a series of long-term trusts.
If the property-owning spouse has died and the parties remain amicable, then an agreement may be possible among the beneficiaries, fiduciaries, and other related parties. On the other hand, if conflicts have already arisen within the family, the only possible solution may be an equitable action to modify or terminate the family trust under the Trust Code of the state where the trust is situated. In Georgia, those provisions are found in O.C.G.A. sections 53-12-62 and 53-12-64.
This writer has already had to facilitate several situations like this in the past six months. We asked the courts for three basic remedies under the foregoing statutes. First, terminate the family trust and order the property distributed to the surviving spouse. Second, modify the family trust to make it more like the marital trust; i.e., the trust the testator intended to hold the bulk of their assets. Third, eliminate the need for a co-Trustee.
While it is hard to predict how much relief the courts will grant, these cases seem to fit squarely within the ambit of the statutes.